Report: Fiscal position adequate to deploy stimulus against slowdown

China has adequate policy buffers to arrest steep falls in economic growth and to maintain domestic demand this year, amid bleak prospects for the global economy, said a report published by the World Bank on Wednesday.

The bank's biannual Global Economic Prospects report estimates China's GDP growth to slow to 7.1 percent this year from 7.4 percent in 2014, with the downtrend set to continue till 2017 with 6.9 percent growth.

"China is undergoing a carefully managed slowdown," the report said.

The multilateral organization believes that China's public debt, which is less than 60 percent of the GDP, can provide fiscal space to employ stimulus against the slowdown. "It also provides some room to bail out banks if nonperforming loans were to rise sharply."

Fiscal space refers to the flexibility of a government in its spending choices, and, more generally, to the financial well-being of a government.

The World Bank said there is very little probability of a sharp decline in China's growth. If such an event were to happen, it would trigger a disorderly unwinding of financial vulnerabilities and have considerable implications for the global economy, it said.

China's growth is still impressive, and will account for more than one-third of the global growth in 2015, said Bert Hofman, country director for the World Bank in China.

"Despite the lackluster recovery in high-income countries, China's economy will still benefit from growing external demand and lower oil prices."

The National Bureau of Statistics is expected to release the full-year GDP for 2014 on Jan 20, with most economists anticipating the full-year number to be around 7.3 to 7.4 percent, the first time that China's growth rate would miss the official target, which was 7.5 percent.

The current stable job market and structural rebalancing pressure will push policymakers to tolerate the "new normal" growth rates of around 7 percent, the World Bank said.

"The 'new normal' growth rates reflect the government's desire to pursue structural reforms that would allow the country to maintain a fast-paced but more sustainable and equitable long-term growth", said Hofman.

Louis Kuijs, chief economist in China with the Royal Bank of Scotland, expects that China will unveil more measures to support growth this year as the leadership believes in the need for sufficient growth.

"China does not have a lot of space on the monetary side due to the rapid increase in leverage over the last six years," he said. "However, it would be better if the stimulus comes from pure fiscal policy measures, with government spending financed by bond issuance, especially central government bonds, as that is an underutilized lever."

He said that the central government should increase fiscal spending especially in areas like health, education and social security.

The World Bank report has forecast global growth to rise moderately to 3 percent in 2015 and average about 3.3 percent through 2017, influenced by soft commodity prices, persistently low interest rates, increasingly divergent monetary policies across major economies and weak world trade.

Developing countries may see a moderate acceleration of growth to 4.8 percent in 2015 and 5.4 percent by 2017.

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