OREANDA-NEWS. January 26, 2015. The International Monetary Fund (IMF) has cut its forecasts for China’s GDP growth this year and next as the global economic rebound plateaus, despite a sharp drop in oil prices.

The Washington-based Fund expects mainland GDP growth to slow to 6.8 per cent in 2015 and to 6.3 per cent in 2016 – estimates revealed in the update to its World Economic Outlook published three months ago.

Back then it expected mainland economic growth of 7.1 per cent and 6.8 per cent in 2015 and 2016, respectively. China's GDP in 2014 rose 7.4 per cent, missing the official target and the slowest in 24 years.

But Gian Maria Milesi-Ferretti, deputy director of research at IMF, said slower growth and lower prices provided a positive backdrop for much-needed structural reform to rebalance the world’s second-biggest economy.

“The decline in oil prices is a positive for China. China needs to rely less on stimulus, which is good for rebalancing. It is going to provide a boost to the Chinese economy in the next few years,” Milesi-Ferretti told the South China Morning Post.

The central government has repeatedly stated its intention to shift the economic mix of the country towards domestic consumption and services, away from the investment-heavy and export-oriented manufacturing formula that has driven massive growth for the last 30 years.

That formula has lifted hundreds of millions of people out of poverty, but it has also polluted the environment, inflated a dangerous real estate bubble and created an enormous debt mountain of off-balance sheet lending in so-called shadow banking activity that distorts financing costs.

“We have concluded from discussions with the Chinese authorities that they will do less public investment and take more measures to clean up shadow banking,” Olivier Blanchard, research director at IMF added.

Investment growth in China declined in the third quarter of 2014, and leading indicators point to a further slowdown, said the IMF report.

One sector where excess capacity is acute in China is real estate, where there are many unsold properties in third and fourth tier cities, Milesi-Ferretti cited. “The bigger macro-economic risk comes from real estate.”

Oil prices which slumped to a 5-1/2 year low  will enable the Chinese government to maintain economic growth at a decent level, without resorting to infrastructure investments to simulate growth, said Milesi-Ferretti.

The fall in oil prices  “is clearly good news” for oil importers like China and the US, but bad news for oil exporters like Russia, said Blanchard.

Given that China’s oil imports account for 2.5 per cent of its GDP, the drop in oil prices translates to a 1.25 per cent boost to China’s GDP, which is fairly substantial, Blanchard added.

China’s slowdown in the short term is due to declining real estate prices, but the ageing population and increasing wealth of Chinese people will be factors that will slow down the nation’s GDP growth in the medium term, said Milesi-Ferretti.

The slowdown in global growth mainly comes from developing nations, which in turn are hurt by the slowing Chinese economy, Milesi-Ferretti explained. “With slower growth in China will come slower import growth for China.”

The multilateral institution projects global GDP growth to be 3.5 per cent this year and 3.7 per cent next year, down from its projection last October of 3.8 per cent and 4.0 per cent respectively.

The World Bank recently downgraded its forecast for global GDP growth this year to 3.0 per cent from 3.4 per cent.

In contrast, IMF has revised up its forecast for GDP growth in the United States to 3.6 per cent this year and 3.3 per cent next year, from its prediction last October of 3.1 per cent and 3.0 per cent respectively. It was the only major economy upgraded in the update to the World Economic Outlook.