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World Bank lowers growth forecasts for East Asia

Lam Yik Fei | Bloomberg | Getty Images

The World Bank lowered its 2013 economic growth forecast for China and developing East Asia on Monday, but maintained that the region will continue to power global growth this year.

"Developing East Asia is expanding at a slower pace as China shifts from an export-oriented economy and focuses on domestic demand," the World Bank said in its latest East Asia and Pacific Economic Update.

"Growth in larger middle income countries including Indonesia, Malaysia, and Thailand is also softening in light of lower investment, lower global commodity prices and lower-than-expected growth of exports," it said.

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Despite the slowdown, developing East Asian economies contribute 40 percent of the world's gross domestic product (GDP) growth, more than any other region, according to the international lender. It forecasts the region will grow 7.1 percent this year – lower than its previous estimate of 7.8 percent, but significantly faster than the peers in the West.

The euro zone economy is expected to contract 0.6 percent in 2013, while the U.S. economy is forecast to grow 2 percent.

"East Asia Pacific continues to be the engine driving the global economy. With overall global growth accelerating, now is the time for developing economies to make structural and policy reforms to sustain growth," said Axel van Trotsenburg, vice president for East Asia and the Pacific at the World Bank.

The World Bank forecasts China's economy will grow 7.5 percent in 2013, in line with the government's growth target, but down from its earlier projection of 7.7 percent. Next year, it forecasts the economy will expand 7.7 percent.

"But risks remain related to the restructuring of China's economy - a greater-than-expected slowdown of investment could have an adverse effect on the region, especially on suppliers of capital goods and industrial raw materials to China," it noted.

Barring China, the rest of developing East Asia is forecast to grow at 5.2 percent in 2013, down from an earlier estimate of 5.7 percent. This marks a deceleration from 6.2 percent growth in 2012.

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However, the growth picture is more encouraging for the region's frontier markets such as Mongolia and Lao People's Democratic Republic, which are expected to register growth of 12.5 and 8 percent, respectively, this year.

Preparing for 'disruptive adjustments'

While East Asian nations stand to benefit from strengthening of developed economies given their trade linkages, they need to prepare better for monetary policy adjustments that accompany the recovery, the World Bank said.

This summer, emerging markets were roiled by the prospect of the Federal Reserve winding down its monetary stimulus, with currencies including the Indian rupee and Indonesian rupiah suffering sharp losses against the U.S. dollar.

"Reducing reliance on short-term and foreign currency denominated debt, accepting a weaker exchange rate when growth is below potential, and building policy buffers to respond to changing global liquidity conditions are some of the ways that can help countries be prepared," Bert Hofman, chief economist, East Asia and Pacific at the World Bank.

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However, there is one point of comfort, it said, noting that reduced capital inflows into the region may be offset by "Abenomics" which could ramp up Japanese investment in the region.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H