OECD Sees China Growth Holding Up Even as Risks Continue Growing

(Bloomberg) -- China's economy will hold up this year and next, but challenges remain as the nation performs a balancing act, according to the Organisation for Economic Cooperation and Development.

Expansion is buoyed by accelerating infrastructure investment tied to regional integration plans and the Belt and Road initiative, the Paris-based group said in a report Wednesday. Consumption growth will remain stable and recovering global demand will support exports.

"In a context of low inflation, monetary policy is appropriately geared to focus on financial risks, which have mounted," the OECD said. "Fiscal policy will remain supportive but should prioritize social inclusion more."

The report also cited weak links in the economy, including an increase in local government debt and possible funding problems at small banks because of a deleveraging campaign.

Other key takeaways include:

• Money market rates have been raised and capital controls tightened 
• Improving corporate profits help curb capital outflows and stabilize the yuan
• Public investment funded by policy banks will prop up growth while slowing the pace of rebalancing
• Rapid expansion of public investment may lead to a further misallocation of capital.
• Intensified measures to address the housing bubble are likely to weigh on property sales and mortgage lending, but are unlikely to curb housing demand significantly as long as prices are expected to rise due to supply constraints
• Economic ties with the Belt and Road economies are strengthening, but a further reduction of trade and investment barriers is necessary to keep up momentum

To contact Bloomberg News staff for this story: Miao Han in Beijing at mhan22@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Jeff Kearns, Henry Hoenig

With assistance from Miao Han