The World Bank cut its 2014-2016 growth forecasts for developing East Asia, noting that China was likely to slow due to policies aimed at putting the economy on a more sustainable footing, and it also cautioned of capital-flight risks to Indonesia.
The Washington-based lender expects the developing East Asia and Pacific (EAP) region to grow 6.9% in 2014 and 2015, down from the 7.1% rate it had previously forecast for both years. Growth in 2013 had been 7.2%.
The bank also trimmed its 2016 growth forecast for the region to 6.8% from 7.1%.
"The main message of this report is one that I would categorise as cautious optimism," World Bank East Asia and Pacific Chief Economist Sudhir Shetty said at a media briefing on Monday on the latest East Asia Pacific Economic Update.
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% in 2014 and 7.2% in 2015, down from 7.7% in 2013. Growth in 2016 was seen at 7.1%.
The World Bank had previously seen China's growth coming in at 7.6% in 2014 and 7.5% 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 economy away from dependence on investment and exports in favour of consumption.
But a slowdown 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.
When asked about the economic implications of the political unrest in Hong Kong, the World Bank's Shetty said the impact on China's economy seemed limited at this point.
"What we anticipate is obviously a greater impact on the Hong Kong SAR (Special Administrative Region), so slower growth in 2014 than was being anticipated earlier. But at this stage our best estimates...are that there isn't as yet significant spillover to the broader Chinese economy," Shetty told reporters.
Housing, capital flight risks
The report noted potential risks in the region's real estate markets. There was slim evidence of price bubbles in the larger economies, which limited chances of "significant" house price corrections. But, an abrupt financial tightening could trigger a disorderly adjustment of housing prices, the report warned.
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."
Growth in developing East Asia and Pacific excluding China will slow to 4.8% in 2014 from 5.2% 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% 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 US 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.
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.
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.