October 29, 2014 / 3:48 AM / 3 years ago

World Bank urges China to cut economic growth target to seven percent in 2015, focus on reforms

BEIJING (Reuters) - China can cut its economic growth target to 7 percent next year without hurting its labor market, the World Bank said on Wednesday even as it urged Beijing to get rid of rigid growth objectives.

Workers labour at a construction site in Beijing October 10, 2013. REUTERS/Kim Kyung-Hoon

At its thrice-yearly review of the Chinese economy, the World Bank warned China against carrying its “ambitious” 2014 economic growth target of 7.5 percent into next year, saying that such a move would detract from the government’s reform plans.

After 30 years of breakneck, double-digit economic expansion that lifted millions of Chinese from abject poverty but also polluted the nation’s air, land and waterways, China wants to retool its economy to generate slower but better-quality growth.

But the quest to let market forces supplant state planning in running the world’s second-biggest economy would require China to live with less frenzied economic growth rates and income rises, a point stressed by the World Bank.

“Our policy message is the focus should be on reforms rather than meeting specific growth targets,” Karlis Smits, a senior economist at the World Bank office in Beijing, told reporters at a media briefing.

“In our view, an indicative target of around 7 percent for 2015 would meet ... the kind of indicative growth that is needed to maintain stability in the labor market,” he said.

The bank’s message on employment would appeal to its audience in Beijing, where Communist Party leaders who are wary of social unrest have said that having a healthy job market is a top policy priority.

Hurt by softening domestic demand as China’s property market sags and investment growth wanes, the Chinese economy has had a rough ride this year, even though the government and the central bank have rolled out a series of support measures to avert an even sharper slowdown.

The economy grew at its slowest pace since the global financial crisis in the September quarter and is expected by analysts to miss China’s official growth target for the first time in 15 years.

The World Bank and other analysts expect the economy to expand by 7.4 percent this year, the slackest in 24 years, and a hair’s breadth from the 7.5 percent target.

And the World Bank made clear that it would not welcome a similar growth target from China next year.

“A prevalent concern is that a policy focused on meeting an ambitious growth target, similar to one set for 2014, would require macroeconomic policies to remain oriented to support domestic demand rather than on reforms,” it said in a report.

The World Bank’s comments echoed those of the International Monetary Fund, which said in July that Beijing should set a growth target of 6.5-7 percent for 2015 and refrain from stimulus measures unless the economy threatens to slow sharply from that level. [ID:nL4N0Q60HV]

Beijing is not expected to announce its 2015 target until next March.

MORE PROPERTY WEAKNESS

On China’s slowing housing market, judged by many economists to be the biggest risk to the economy, the World Bank predicted that property prices could fall further in coming months due to an over-supply of homes.

In China’s biggest cities - Beijing, Shanghai, Guangzhou and Shenzhen - home inventory levels have more than doubled since the start of 2013, the bank said. For every square meter of homes sold in those cities, there are 13 square meters of unsold property.

The ratio of housing inventory to sales was even higher in smaller, “second-tier”, cities at around 17, though off a peak of about 20 seen earlier this year, the World Bank said.

“Excess inventory will depress housing prices over the next few quarters,” the bank said, adding that any policy response is constrained by the fact that China’s housing market needs to undergo some structural adjustment that is not temporary.

Smits alluded to speculation and lack of other investment avenues driving excess investment in certain cities in the past. However, housing starts shifted in the first half of the year to correspond to areas of highest population growth, indicating market forces are taking hold.

While some analysts have argued that only by advancing reforms can China power its future economy, the World Bank cautioned that any growth impetus derived from reforms would not be as potent as those in the past.

“‘Second generation’ reforms are likely to have a smaller impact on growth than the ‘first generation’ reforms implemented over the last few decades,” the World Bank said.

A calculation made by the World Bank and the Development Research Center - a think-tank linked to the Chinese cabinet - showed that reforms would increase China’s potential growth by about 0.8 percentage points in the first year, the bank said.

Spread over five years, reforms would raise China’s growth potential by a total of 3.5 percentage points, it said.

“Implementing such a coordinated reform plan can accelerate China’s economic growth potential, but it will not reverse a moderation of growth over the next decade,” the bank said.

(This version of the story was refiled to fix typo in sixth paragraph from the bottom)

Reporting by Jake Spring; Writing by Koh Gui Qing; Editing by Kim Coghill

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