BEIJING, May 23 (Reuters) - The World Bank cut its economic growth forecast for China this year to 8.2 percent on Wednesday and urged the country to rely on easier fiscal policy that boosts consumption rather than state investment to lift activity.
In a biannual East Asia and Pacific economic update, the World Bank said a slowing China will drag growth in emerging East Asia to two-year lows this year, but warned Europe's seething debt crisis could inflict even bigger damage if it worsens.
Sluggish U.S. and European demand and a softening Chinese property market would combine to weigh on the Chinese economy in the near term, it said.
But if governments and central banks act in time to stabilise activity, economies should recover next year.
It said countries could further loosen monetary and fiscal policies to foster activity, but noted their room for manoeuvre is constrained by inflation risks that could spike when growth rebounds amid rising public debt now.
"The region's authorities should remain flexible to shift monetary policy gears should growth gain traction and inflationary pressures build up," the World Bank said.
In China, where 2012 economic growth was lowered to 8.2 percent from 8.4 percent previously, it said Beijing should only marginally tweak monetary policy for now by lowering banks' reserve requirements as real interest rates are negative.
That leaves the world's No. 2 economy to lean on fiscal policy instead to fuel growth.
"Fiscal stimulus would ideally be less credit-fuelled, less local government-funded, and less infrastructure-oriented," the World Bank said.
"Fiscal measures to support consumption, such as targeted tax cuts, social welfare spending and other social expenditures, should be viewed as the first priority."
The World Bank's recommendations come just a day after a top Chinese financial paper cited unnamed sources as saying China will fast track approvals for infrastructure to combat an economic downturn. [ID:nL3E8GM26W]
The World Bank's lowered growth forecast for this year also comes after the International Monetary Fund kept its forecast for China unchanged at 8.2 percent in its April report.
