World Bank cuts growth forecast for China, developing East Asia

The World Bank cut its growth forecast for developing economies in East Asia and the Pacific region as a whole in 2013 to 7.1 percent from the previous forecast of 7.8 percent, according to a report it released on Monday.

The East Asia and Pacific Economic Update, released every six months, also cut its forecast for China from 8.3 percent to 7.5 percent.

"Growth in China is expected to meet the official indicative target of 7.5 percent this year. The short-term outlook is improving as industrial production data suggests further strengthening of output in the third quarter," it said.

"China is likely to see further rebalancing of its economy by slowing credit growth and investment, although the pacing is likely to depend on overall growth," said the report.

Bert Hofman, World Bank East Asia and Pacific chief economist, said the slower growth will in a way help China in the medium term as it goes through reforms to restructure the economy.

The report said the developing economies in East Asia is experiencing a slowdown in their domestic demand, as stimulus programs are being phased out. Domestic demand has been the main driver of growth in the region in the post-global financial crisis period.

Nevertheless, the World Bank said that the East Asia and Pacific region continued to be the engine driving the global economy, contributing 40 percent of the world's gross domestic product growth.

The slowdown in investment in China could have an impact on the region, especially on suppliers of capital goods and industrial raw materials to China, the report said.

"With overall global growth accelerating, now is the time for developing economies to make structural and policy reforms to sustain growth, reduce poverty and improve the lives of the poor and vulnerable," said Alex van Trotsenburg, World Bank East Asia and Pacific Regional Vice President.

However, the economies should also be better prepared for potentially disruptive adjustments.

Hofman said the United States' rewinding of its quantitative easing and loose monetary policy will come a time when the economic growth in the world's largest economy is sustainable.

"Tapering will start. It won't start at a bad time. Therefore the pluses of a thriving United States, which will have lots of import demand from the region, will, in our view, benefit the region," Hofman told reporters.

Speculation about the withdrawal of quantitative easing in the United States led to stock market sell-offs and currency depreciation in countries with large foreign participation in their financial markets over the past few months.

Hofman said the World Bank does not have any specific number on the amount of capital outflow from the emerging markets.

Nevertheless, the World Bank report said that the net capital flows to developing countries between 2008 and 2012 rebounded from 490 billion U.S. dollars to 800 billion U.S. dollars. Flows to the East Asia and Pacific region more than doubled to 460 billion U.S. dollars.

Hofman also said that the Federal Reserve's decision to delay the tapering of its quantitative easing will give authorities in the emerging economies a second chance to take measures to lower risks from future volatility.

Adjustment is already happening. One would actually expect that maybe once it happens, there might be "less volatility than what we saw," he said.