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China Economic Update - October 2014

World Bank Group

  • Growth in China continued to slow in 2014, reflecting policy steps to put economic growth on a more sustainable footing.
  • Policy efforts to tighten credit growth, reduce excess capacity, internalize the cost of industrial pollution, and harden budget constraints of local governments accelerated in 2014.
  • Targeted support measures and the recovery of external demand have limited the growth slowdown, but pressures from the weak housing market remain a significant drag on domestic economic activity.
  • The real estate sector, an important engine of growth of recent years, continues to adjust to policies to tighten credit and reduce supply mismatches.
  • The growth forecast for 2014 has been revised downward to 7.4 percent, still meeting the government’s indicative growth target of about 7.5 percent.
  • For 2015–16 average growth is expected to ease to slightly above 7 percent as policy efforts to place the economy on a more sustainable growth path are likely to intensify.
  • The government’s indicative growth number for 2015 will signal the priority that the authorities put on growth and reforms.
  • The current emphasis on meeting short-term growth targets will make it more challenging to implement the policies necessary to shift growth to a more sustainable medium-term path.
  • In an uncertain global economic environment, China’s sizable policy buffers could be reserved to maintain overall macroeconomic stability in case of unexpected domestic or external economic shocks.
  • China’s key medium-term policy challenge remains implementing reforms that support China’s next transformation toward more efficient, equitable, and sustainable growth.
  • A comprehensive reform plan was introduced to put China’s public finances on a more stable footing.
  • Revisions in the budget law provide far greater transparency and accountability for local government debt management.
  • Reform plans were announced to make gradual adjustments to the hukou system to integrate migrants into urban life.
  • Implementing reforms can accelerate China’s economic growth potential, but it will not reverse a moderation of growth over the next decade.
  • Without policy action, the slowdown in China’s potential growth in the medium term could be more severe.