According to the World Bank, the 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. Both monetary and fiscal policy stance is expected to remain accommodative to limit risks of too rapid growth slowdown that could trigger disorderly adjustments in accumulated imbalances.
A slower pace of economic growth will bring slower household income growth and hence a deceleration, but not a stop, in the fall of rural poverty. Poverty is expected to decline further—poverty rates in rural areas are projected to decline from 6.4 in 2014 to 2.8 percent in 2017 (the World Bank poverty line of US$ 1.25/day).
The World Bank report warns that a failure to strengthen the vulnerabilities in the financial sector could leave the economy increasingly saddled with inefficient firms, bad loans and weaker financial institutions. This could reduce economic activity by undermining productivity growth and increasing capital misallocation.
Second, the housing sector might not bottom out, instead continuing to decelerate, further undermining consumer confidence and economic activity. Third, managing local government debt remains a challenge. While policy initiatives to refinance local government debt are targeted to address specific vulnerabilities, accommodative policies if not accompanied with structural reforms will make it more challenging to implement the policies necessary to shift growth to a more sustainable medium-term path.
China’s growth had moderated to 7.4 percent in 2014 as policy efforts to tighten credit growth, reduce overcapacity, internalise the cost of industrial pollution and harden budget constraints of local governments intensified last year.
On the supply side, week domestic demand and policy tightening in energy-intensive sectors continued to weigh on industrial activity. In contrast, services remained upbeat as the structure of economic growth continued to evolve from an industrial to a service base.
Average disposable income in urban households grew at real annual rates above 8 per cent between 2010 and 2012, but only at 4.9 per cent in 2014. Similarly, real growth in average net income in rural households went from 12.1 per cent in 2011 to 9.4 per cent in 2014. The combination of falling real urban wages with flat unemployment rates and growing migration indicates that the deceleration of the economy has translated into price (wages) rather than quantity (jobs) adjustment in urban labour markets.
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