BEIJING China's economy is likely to grow around 7 percent this year and 6.9 percent in 2016 as the government pushes reforms on interest rates and the currency and pursues slower but higher-quality growth, the OECD said on Friday.
China can avoid an abrupt slowdown as long as the government ensures an orderly unwinding of economic imbalances, the Organisation for Economic Co-operation and Development said in its latest survey on the world's second-largest economy.
OECD Secretary-general Angel Gurria said he also expected domestic demand will be strong enough to prevent deflation.
"I think 7 percent (economic growth) is more sustainable, 7 percent avoids bubbles and 7 percent is attainable," he told Reuters in an interview.
Beijing has been trying to reduce excess factory capacity, local government debt and risks from a cooling property market, which are likely to drag growth to a quarter-century low of around 7 percent this year from 7.4 percent in 2014.
"Imbalances in the property and some heavy industry sectors have started to unwind and while risks remain, they appear to be manageable," the OECD said in the survey, adding that it expected property prices to correct further until the existing inventory overhang is absorbed.
A sharper-than-projected economic slowdown economy would have global spillover effects through trade and investment channels, it said.
FASTER RECOVERY IN EUROPE
China's exports of goods and services could grow 5.5 percent this year and 6 percent in 2016, the OECD predicted.
"A stronger U.S. dollar may adversely impact export
competitiveness as long as the renminbi remains closely linked to it," it said.
Although the yuan CNY=CFXS weakened versus the dollar earlier this year, it clawed back those losses this week and has gained against currencies of most major trade partners.
The central bank has cut interest rates twice since November, on top of a cut in bank reserve requirements in February, amid concerns about growing deflationary risks, and more such moves are expected.
In addition, the government plans to run its biggest budget deficit in 2015 since the global crisis to support spending.
Chinese leaders have been pushing fiscal reforms to deal with the root cause of local debt and steadily liberalising interest rates to put the economy on a more sustainable footing.
Central bank governor Zhou Xiaochuan said last week that a long-awaited deposit insurance system would be rolled out in the first half of 2015 and caps on bank deposit rates would very likely be removed this year.
"Full interest rate liberalisation needs to be preceded by greater exchange rate flexibility to help the economy absorb shocks," The OECD said.
"A more flexible currency is also a prerequisite to opening up the capital account."
China's central bank has pledged to introduce greater two-way flexibility of the yuan, which is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.
Turning to Europe, Gurria said the continent is heading towards a faster economic recovery due to low oil prices, low interest rates and a "more competitive" euro currency, adding to optimism about the world economy.
The OECD has raised its euro zone growth forecast to 1.4 percent this year and 2.0 percent in 2016, in both cases up 0.3 points on its last forecast made in November 2014, thanks to an acceleration of activity in the zone's largest economy, Germany.
(Editing by Kim Coghill)