The World Bank cut its growth forecast for China to 7.7 percent yesterday, down from its previous projection of 8.3 percent in April as Chinese policymakers "rebalance the country's growth model."
It was the second cut since December when the bank expected that China would grow at 8.4 percent in 2013.
"The main risk related to China remains the possibility that high investment rates prove unsustainable, provoking a disorderly unwinding and sharp economic slowdown," the bank said in its Global Economic Prospects.
"Should investments prove unprofitable, the servicing of existing loans could become problematic - potentially sparking a sharp uptick in non-performing loans that could require state intervention," the bank said.
It expected growth in the East Asia and Pacific region to slow to 7.3 percent this year, largely due to weaker performance in China as the country started to reduce its reliance on net exports and investment.
The bank said China should address challenges related to the property sector, the financial system and local government liabilities to avoid a sharp slowdown.
Globally, the bank downgraded its economic projection for this year to 2.2 percent from 2.4 percent, citing subdued growth in high-income countries, especially in Europe, despite improvements in their financial condition.
Last year, China's gross domestic product expanded 7.8 percent from a year earlier, the slowest in eight years. In the first quarter, growth moderated further to 7.7 percent, defying market expectations of a mild recovery.
Also yesterday, Barclays lowered its 2013 growth forecast for China to 7.4 percent from a previous 7.9 percent on the country's smaller growth potential and structural reform.
It said China's economy may expand 7.5 percent in the second quarter of this year and an average of 7.2 percent in the second half.
"While we remain cautious about growth, we are not getting bearish," said Barclays economist Chang Jian. "It should be noted that local governments continue to have strong enthusiasm for growth and development."
Data on China's industrial production, fixed-asset investment and retail sales all indicated growth slowed further in May, while exports and imports crashed.
As growth slowed further with little inflationary pressure, Zhou Hao, an economist at Australia and New Zealand Banking Group Ltd, said China's central bank may change its monetary policy stance to support growth.
"There is an imminent need for the central bank to cut the policy interest rate by 25 basic points," Zhou said earlier in a note.
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