As China’s economic growth slows, the country needs to enact structural reforms to avoid a sharper-than-projected slowdown that could have global effects, the Organisation for Economic Cooperation and Development said Friday.

While Beijing’s 7% economic growth target for 2015 is “sustainable and appropriate,” the OECD said in an annual survey of the world’s second-largest economy, a sharp drop in the property market, disorderly corporate defaults, and insufficient monetary and fiscal stimulus could send the economy off track.

OECD Secretary-General Ángel Gurria

OECD Secretary-General Ángel Gurria

“Risks are mostly on the downside, and a sharper-than-projected slowdown of the Chinese economy would have global spillovers both directly through trade and investment channels but possibly also via confidence effects,” the report warns.

To avoid that scenario, the OECD recommends that China embrace an “unwavering commitment to structural reforms” and move toward an economy driven by consumption and services from one heavily reliant on on investment and manufacturing.

“The country needs to adjust its economic model to place the economy on a sustainable long-term footing,” Secretary-General Ángel Gurria told reporters.

He said China had already made important policy changes in such areas as financial market liberalization and intergovernmental fiscal relations by allowing sub-national government bond issuance, “but there is still much work to do.”

Gurria identified “three critical challenges” for China — allowing the market to play a greater role in the allocation of resources, reforming the education system, and facilitating the transition from a rural to an urban economy.

State-owned enterprises are “creating barriers to the expansion of private firms” in such industries as construction, which “is particularly detrimental at the current juncture when China strives to move up the value chain from producing goods ‘made in China’ to a larger range of goods and services ‘created in China,’” Gurria said.

He also urged financial deregulation, noting that “Policy distortions in financial markets have caused a misallocation of capital and an expansion of the shadow banking sector. Looking forward, a continuation of market-oriented reforms that liberalize deposit interest rates and allow greater flexibility in the exchange rate should improve capital allocation.”

Photo: Chatham House, via Wikimedia Commons, CC BY 2.0

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