China can afford 7% growth rate in 2015: World Bank

John Phillips | CNBC

China can afford to cut its 2015 economic growth target to 7 percent and still keep its labor market healthy, the World Bank said on Wednesday, even as it urged Beijing to stop setting rigid growth objectives.

"Our policy message is the focus should be on reforms rather than meeting specific growth targets," Karlis Smits, a senior economist at the World Bank office in Beijing, told reporters at a media briefing.

"In our view, an indicative target of around 7 percent for 2015 would meet... the kind of indicative growth that is needed to maintain stability in the labor market," he said.

After 30 years of breakneck, double-digit economic expansion that lifted millions of Chinese from abject poverty but also polluted the nation's air, land and waterways, China wants to retool its economy to generate slower but better-quality growth.

China is moving in the right direction: Merk
China is moving in the right direction: Merk   

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It aims to grow its economy by around 7.5 percent this year, though many analysts expect annual growth to hit 7.4 percent, the lowest in 24 years. Both the government and the central bank have rolled out a series of support measures so far to avert risks of a sharper slowdown.

A sweeping reform plan that is China's most ambitious in 30 years aims to overhaul the economy to let market forces supplant central state planning in directing the world's second-largest economy.

The World Bank on Wednesday encouraged China to focus on reforms.

"A prevalent concern is that a policy focused on meeting an ambitious growth target, similar to one set for 2014, would require macroeconomic policies to remain oriented to support domestic demand rather than on reforms," it said.

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While some Chinese analysts have argued that only by advancing reforms can China power its future economy, the World Bank cautioned that any growth impetus derived from reforms would not be as potent as those in the past.

"'Second generation' reforms are likely to have a smaller impact on growth than the 'first generation' reforms implemented over the last few decades," the World Bank said in its thrice-yearly update on the Chinese economy.

A calculation made by the World Bank and the Development Research Center - a think-tank linked to the Chinese cabinet - showed that reforms would increase China's potential growth by about 0.8 percentage points in the first year, the bank said.

Spread over five years, reforms would raise China's growth potential by a total of 3.5 percentage points, it said.

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"Implementing such a coordinated reform plan can accelerate China's economic growth potential, but it will not reverse a moderation of growth over the next decade," the bank said.