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"Developing East Asia is expanding at a slower pace as China shifts from an export-oriented economy and focuses on domestic demand," the World Bank said in its latest East Asia Pacific Economic Update report.
"Growth in larger middle-income countries including Indonesia, Malaysia, and Thailand is also softening in light of lower investment, lower global commodity prices and lower-than-expected growth of exports," it added.
The Washington-based development bank now expects developing East Asia to expand by 7.1% this year and by 7.2% in 2014, down from its April estimate of 7.8% and 7.6%, respectively.
CHINA LOCAL GOVERNMENT DEBT A CONCERN
On China, the World Bank said the massive, investment-heavy stimulus program supported by credit expansion had run its course, and policymakers must focus on containing the rapid growth of credit and tighten financial supervision.
It added local government debt was a concern, given the complexity and opacity of municipal finances, and said they should be reformed "with clear rules on borrowing, on allowed sources of borrowing, on debt resolution, and on the disclosure of comprehensive financial accounts by local governments".
"The rapid expansion of shadow banking poses serious challenges, since shadow banking is closely linked to the banking system, is less regulated, and operates with implicit guarantees from banks and local governments," the World Bank said.
But it added local governments in China had significant assets to meet liabilities as they held land reserves worth 10% of gross domestic product (GDP) as well as shares in state-owned enterprises worth a similar amount.
China had shown some progress in rebalancing its economy, it added, with consumption contributing more to quarterly growth than investment in the two years up to the first quarter of 2013 and services accounting for a larger share of GDP.
"Still, the economy has yet to make the decisive turn toward consumer-based growth," the World Bank said.
The World Bank now expects the Chinese economy to expand by 7.5% this year, down from its April forecast of 8.3% and below the International Monetary Fund's most recent forecast of 7.75%.
China's 2014 growth is estimated at 7.7%, the World Bank said, down 0.3%age point from the previous prediction.
The IMF is due to publish its new world economic outlook on Tuesday ahead of the fund's annual meeting.
INDONESIA, PHILIPPINES
Turning to Indonesia, the World Bank said investment growth reached a three-year low in the second quarter and is likely to face headwinds from interest rate hikes in response to rising inflation and capital outflows as well as from a slowdown in foreign direct investment and regulatory uncertainties.
"Lower global commodity prices have dampened export receipts and slowed private investment in the capital-intensive resource sectors of the Indonesian economy, depressing overall growth," the World Bank said.
The World Bank cut its growth forecast for Indonesia to 5.6% for 2013 and 5.3% next year, down from its previous estimates of 6.2% and 6.5%, respectively.
As for the Philippines, investments slowed in the second quarter after a strong first three months of the year. But remittances from Filipinos working abroad boosted consumption, which contributed three-fourths to growth in the April-June.
The World Bank expects the Philippines to grow by 7.0% this year, much faster than the April forecast of 6.2%. For 2014, the economy would probably expand by 6.7%, better than the previous estimate of 6.4%.
The World Bank said its latest regional forecasts faced greater likelihood of being revised downwards than upwards, citing potential headwinds such as a less orderly tapering of the US Federal Reserve's stimulus programme and a prolonged fiscal deadlock in Washington.
World Bank East Asia and Pacific Chief Economist Bert Hofman added, however, that the reversal of capital flows in developing East Asia may be offset by Japan's new strategy to exit deflation and revive growth, commonly referred to as "Abenomics".
Japan's efforts to reflate its economy could spill over to emerging Asian economies through expanded bank lending, portfolio rebalancing, and increased outward foreign direct investment, he said.
