World Bank Predicts Slower Growth in China

China’s economic growth is forecast to decelerate over the next two years mainly because of domestic policy tightening, the World Bank said in its China Economic Update, released Tuesday.

The Washington-based lender said the economy remained strong this year, underpinned by rising household incomes and improving external demand. The growth projection for 2017 was lifted to 6.8% from 6.7%, Business Insider reported.

Business sentiment strengthened, job creation remained buoyant, capital outflows stabilized and the currency appreciated against the US dollar, the update said.

However, the lender forecast growth to ease to 6.4% next year and 6.3% in 2019. The projections were left unrevised from its previous forecast published in October.

According to the World Bank, prudent monetary policy, stricter financial sector regulation, and the government’s continuing efforts to restructure the economy and reign in the pace of leveraging are expected to contribute to the growth moderation.

Reducing fiscal and financial vulnerabilities is likely to come at the cost of slower GDP growth in the near term but will improve China’s long-term economic prospects, the bank said.

The agency noted that favorable economic conditions make this a particularly opportune time to further reduce macroeconomic vulnerabilities and pursue reforms that target “better quality, more efficient, fairer, and more sustainable development,” as emphasized by President Xi Jinping during the 19th Party Congress in October.

The agency observed that the main challenge for China is the transition to more equitable and sustainable growth.

Still, the bank warned that as China accelerates deleveraging, it is likely to stunt growth in the near term. It also pointed out that despite recent improvements in the global economic environment, there are also external risks to the country’s outlook.

They largely stem from the threat of more restrictive trade policies in advanced countries and increased geopolitical tensions.

“Prudent monetary policy, stricter financial sector regulation, and the government’s continuing efforts to restructure the economy and to rein in the pace of leveraging are expected to contribute to the growth moderation,” the bank said.

China is already tightening its grip on outbound investment risks with a code of conduct for state-owned enterprises, according to the influential government-owned China Daily newspaper.

While exact details have yet to be released, the overall regulatory framework will be similar to the one targeting private companies issued on Monday. At the heart of this policy document is the decision to curb businesses from pursuing high-leverage fundraising in overseas countries.