The World Bank sees economic growth in China falling below 7% in the next two years, according to its six monthly East Asia Pacific Economic Update.
China growth, which eased 0.3 of a percentage point to 7.4% in 2014, is now expected to decelerate to 7.1% in 2015 and 6.9% by 2017. This is 0.1 of a percentage point lower than earlier World Bank estimates. China itself is forecasting 7% this year.
"Continued measures to contain local government debt, contain shadow banking, reduce excess capacity, curb energy demand, and control pollution will reduce investment and manufacturing growth," the World Bank says.
"However, targeted stimulus is expected to continue to mitigate the impact on short-term growth, should this show signs of slowing considerably below the government's indicative target of about 7%.&rdquo."
Market commentators see further falls in the prices of commodities as demand from China keeps slipping. Iron ore is trading down, on the back of recuced demand from China, 60% over the last year to around $US47 a tonne.
The World Bank sees weak domestic demand, capital outflows, a sluggish real estate sector and deflationary pressures.
Falls in China's GDP growth would have a large impact on commodity exporters such as Australia.
"The significant negative impact on Australia and New Zealand, among the world's largest commodity suppliers, would lead to indirect spillovers on the Pacific Island Countries, given their tight links through trade, investment, and aid,” the World Bank said.
China has been easing monetary policy, making it easier to borrow to buy housing as the economy resets from investment-led growth. There were two interest rate cuts in February 2015 following one in November 2014.
“China’s overall fiscal position remains strong, but a slowdown in real estate translated into slower revenue growth,” says the World Bank economic update.
"Progress in rebalancing the sources of growth in domestic demand will remain gradual. Investment growth will continue to decelerate due to credit tightening and ongoing adjustments in the real estate sector. And economic growth will continue to evolve from an industrial to a services base."
Growth in the rest of developing East Asia is expected to rise by half a percentage point to 5.1% this year, largely driven by domestic demand in the large Southeast Asian economies.
China and the region are still well ahead of the global average growth forecasts of 2.5 in 2012–14 to 3.1%.
Growth in high-income economies will continue to increase, from 1.7% in 2014 to an average 2.2% in 2015–17.
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