The World Bank cut its 2014-2016 growth forecasts for developing East Asia and China, and cautioned of capital-flight risks to Indonesia while growth in China is seen slowing due to policy measures aimed at putting the economy on a more sustainable footing.
The Washington-based lender expects the developing East Asia and Pacific (EAP) region to grow 6.9 percent in 2014 and 2015, down from the 7.1 percent rate it had previously forecast for both years. Growth in 2013 had been 7.2 percent.
The bank also trimmed its 2016 growth forecast for the region to 6.8 percent from 7.1 percent.
"Regional exports and growth will benefit from a gradual recovery in high-income economies," the World Bank said in its latest East Asia Pacific Economic Update report on Monday.
Developing East Asia and Pacific will remain the fastest-growing developing region, it added.
Possible risks to the outlook include a weaker-than-expected recovery in global trade and any abrupt rise in global interest rates, the report said, adding that its baseline scenario was based on an orderly normalisation of monetary policy in the United States.
The World Bank said growth in China was likely to slow to 7.4 percent in 2014 and 7.2 percent in 2015, down from 7.7 percent in 2013. Growth in 2016 was seen at 7.1 percent.
The World Bank had previously seen China's growth coming in at 7.6 percent in 2014 and 7.5 percent in 2015 and 2016.
"Measures to contain local government debt, curb shadow banking, and tackle excess capacity, high energy demand, and high pollution will reduce investment and manufacturing output," it said regarding China's outlook.
China's economy has struggled to recover from a soft start to the year when growth slowed to its weakest in 18 months in the first quarter. Beijing has indicated it is prepared to accept slower growth as it tries to wean the world's second-biggest away from dependence on investment and exports in favour of consumption.
But a rapid downturn in the housing market has become an increasing drag on the broader economy, prompting Beijing and local governments to step up efforts to restore momentum.
Housing, capital flight risks
The potential risks in the region's real estate markets also came in for some cautionary comment in the lender's report, which said an abrupt financial tightening could trigger a disorderly adjustment of housing prices.
On China, the bank said: "A major nationwide correction in real estate prices in China remains unlikely, although there may be pressure on prices in several of the less rapidly growing provinces."
Overall, the report added that evidence of significant bubbles in the larger EAP economies are weak, which limits the scope for 'significant' house price corrections.
Growth in developing East Asia and Pacific excluding China will slow to 4.8 percent in 2014 from 5.2 percent in 2013 due to the slowing economies of Indonesia and Thailand, the World Bank said, adding that growth was likely to rise to 5.3 percent in 2015.
While the region's vulnerabilities to capital-flow reversals have decreased over the past year, Indonesia remains relatively exposed due to its high short-term external financing needs, it said.
The U.S. Federal Reserve is expected to start raising interest rates at some point next year, with analysts expecting a more aggressive tightening-cycle by the Fed to potentially trigger a destabilising flight of capital from some emerging market economies.
Economic growth in Indonesia is likely to be held back in the second half of 2014 by weakness in commodity-related income, lower-than-expected government consumption and slower credit expansion, the report said. In Thailand, the respite from recent political unrest will lead to a resumption of growth, it added
Broad risks to the region include the possibility of slower than expected recovery in global demand, as well as any rapid increase in interest rates, which could lead to debt servicing issues in some EAP countries, particularly among households and corporates, the World Bank said.
"In Malaysia and Thailand, where household debt ratios are high, abruptly rising interest rates could strain household budgets and potentially slash consumption spending," it said.
"In China...rapidly rising interest rates could create liquidity issues, and potentially also solvency issues, among marginal corporate borrowers in troubled excess-capacity industries," the report added.
Another risk to the region would be a sharp slowdown in China but the likelihood of that is low, partly because Beijing has fiscal buffers to provide economic stimulus, or to bail out banks if non-performing loans emerge, the World Bank said.