World Bank highlights challenges facing China

A cooling economy may cause both a regional slowdown and plunging commodity prices, the World Bank warned, as the State Council reiterated its determination to ensure steady growth.

The bank also lowered its growth estimate to 8.2 percent from 8.4 percent in April.

"China's near-term policy challenge is to sustain growth through a soft landing, and the ongoing slowdown is partly welcome because it reflects a deceleration in growth from above-potential levels," the bank said on Wednesday in its biannual East Asia and Pacific economic update.

"However, while the prospects for a gradual slowdown remain high, there are concerns that growth could slow too quickly."

Concerns over slowing growth have intensified after weak economic data for April, released last week, highlighted declining production, trade, investment and credit growth.

At an executive meeting of the State Council on Wednesday, Premier Wen Jiabao vowed to place greater priority on maintaining steady growth.

"Some contradictions and problems still exist in the economy. Downward pressure is increasing," the premier said.

Efforts should be taken to improve flexibility and vision and domestic demand must be boosted, he said.

Vice-Premier Li Keqiang, during a tour on Tuesday to East China's Jiangsu province, also urged greater consumption through more public spending on medical reform and more affordable housing projects.

The World Bank is confident that the government has sufficient room for maneuverability to respond to downside risks.

"Given the already accommodative monetary stance, the burden of any policy support should fall on fiscal policy," the Washington-based lender said.

Fiscal stimulus should be less credit-fueled, less local government-funded, and less infrastructure-oriented, unlike the four-trillion yuan ($630 billion) package in 2008, the bank suggested.

"Measures to support consumption, such as targeted tax cuts, social welfare spending and other social expenditures, should be viewed as the first priority," according to the report.

Monetary policy could also be adjusted on the margin, as bank reserve requirements could be tweaked further to ease the availability of credit. But cutting interest rates would better be reserved for further downside scenarios considering the positive real rates, according to the report.