With China's growth rate moderating, the country is confronted with a delicate balancing act in its economic restructuring and reforms, the World Bank said on Monday.
"Efforts to cut excess capacity in heavy industry, reduce supply mismatches in residential property, dampen unproductive risk taking in shadow banking and harden budget constraints on local governments will help make investment more efficient and realign growth over the medium term," the World Bank said in the East Asia Pacific Economic Update.
"However, such reforms will depress activity in the short term. It is critical that any offsetting stimulus measures be designed not to undermine restructuring efforts. In particular, any fiscal stimulus program will need to avoid unsustainable increases in local government debt," suggested the Washington-based global lender.
The Chinese economy posted a 7.4-percent growth in 2014, its weakest since 1990. The annual growth target set by the government was lowered to around 7 percent for 2015, but more stress was laid on better-quality and innovation-driven growth.
China's growth is expected to moderate to around 7 percent in the next two years, reflecting continued policy efforts to address financial vulnerabilities and gradually shift the economy to a more sustainable growth path, noted the biannual report.
As China shifts to a consumption-led, rather than an investment-led, growth model, the main challenge is to implement reforms that will ensure sustainable growth in the long run, said the World Bank.