OREANDA-NEWS. Growth in the People’s Republic of China (PRC) will continue its moderate deceleration in 2015 and 2016 as the government targets lower growth and continues its program of structural reforms, says a new Asian Development Bank (ADB) report.

ADB’s flagship annual economic publication, Asian Development Outlook 2015 (ADO), released today, says Asia’s largest economy is set to post gross domestic product (GDP) growth of 7.2% in 2015 and 7.0% in 2016. This compares with growth of 7.7% in 2013 and 7.4% in 2014. The PRC is likely to retain its position as the biggest contributor to world GDP growth in 2015 and 2016.

“In spite of the natural forces for growth moderation such as a shrinking working-age population and rising labor costs, the PRC economy can continue to deliver solid growth as long as the government makes steady progress on its reform agenda which can elevate productivity,” said ADB Chief Economist Shang-Jin Wei. “Deepening financial sector reforms—such as reducing the dominance of state-owned banks and liberalizing interest rates while preserving financial stability—is a key element of the needed reform package.”

In 2014 output growth slowed in all sectors except agriculture, with investment growth in real estate halving year-on-year amid tighter financing conditions and housing oversupply. Consumption growth remained robust, supported by strong growth of 8% in households’ real disposable incomes on the back of higher wages and social transfers. Exports expanded 6.8% year-on-year, growing more quickly than global trade, while import growth halved as demand for construction materials declined, resulting in a higher trade surplus equal to 4.6% of GDP. The current account surplus expanded to 2.1% of GDP.

While 2015 and 2016 growth will continue to decelerate, productivity improvement resulting from domestic reforms and lower commodity prices, strong domestic consumption growth, and steady recovery of high-income markets for the PRC’s exports will limit the slowdown. Consumer price inflation in 2014 dipped from the year earlier, reflecting softer food and oil prices and credit growth, and this trend is expected to continue in 2015, before a mild upturn in 2016.

The strengthening of the renminbi against the currencies of most of the PRC’s trade partners that began in 2014 may continue in 2015, in line with a strongly appreciating US dollar and the still close connection between the two currencies. The monetary policy of the People’s Bank of China will continue to strike a balance between limiting credit expansion in the financial and property sectors, while accommodating the need for credit support to small and medium-sized businesses.

“It is time to ask whether the renminbi has become overvalued relative to fundamentals,” said Mr. Wei. “Perhaps a more market determined exchange rate could increase the country’s competitiveness. Reforming the remaining state-owned firms could also lead to an improvement in overall productivity.”

The key downside risk from the world economy to the ADO forecast stems from a higher-than-expected rebound in commodity prices. The main domestic risk is that an increasingly rigid labor market cannot accommodate the need for industrial restructuring triggered by a combination of domestic wage increases and real exchange rate appreciation.

The ADO notes progress on reforms aimed at putting local government finances on a sounder footing. Local government debt—including guarantees and contingent liabilities—has risen from around 18% of GDP in 2008 to above 30% in 2013. This increase reflects the creation of off-budget financing vehicles by local governments to provide funds needed to meet the gap between their revenue and expenditure.

The central government has been taking steps to prevent additional off-budget borrowing, while allowing selected local authorities to issue bonds to finance their deficits. This bond issuance program will be expanded going forward, while the central government is expected to look at other fund raising measures, including the possible sale of local government shares in state-owned enterprises. Improving the environment for public-private partnerships is also seen as a way of helping local governments reduce their outlays for infrastructure investments.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region.