China's economy to decline to 6.5% this year: Asian Development Bank

China's growth will decline to 6.5% this year and slide further to 6.3% in 2017, the Asian Development Bank forecast today as it warned the world's second-largest economy over its huge industrial overcapacity.

"Weak external demand and excess capacity in some sectors, on top of a shrinking labour force and rising wages, continue to induce a gradual decline in China's growth rate," Shang-Jin Wei, ADB's chief economist, said.

The ADB warned that in the long-run China faces a demographic squeeze as the population ages. China's economy grew 6.9% year-on-year in 2015, to its lowest annual expansion in a quarter of a century. It targets to achieve a growth rate of 6.5-7% this year.

"Supply-side reforms, including improving labour market flexibility, are needed to improve the economy's resilience to negative shocks and raise its potential growth," Wei said during the release of Asian Development Outlook 2016 report.

The sharp slowdown in investment, particularly in real-estate and capital-intensive industries, will remain a drag on the economy, but this will be partly offset by further government spending on infrastructure and green investment, said the report by the Manila-based multilateral bank.

Key risks include weakening global demand, volatility in financial markets, and another dip in global commodity prices. Domestically, a weakening consumer sentiment and a rise in bad loans would undermine economic performance, the ADB said.

"The national government's more gradual approach to reducing production capacity, and its encouragement of mergers rather than bankruptcies in state companies, is helping to avoid a more extreme fallout from rebalancing the economy," it said.

China has announced plans to cut by about 10% production capacity in the steel and coal sectors in next five years. But experts believe this is unlikely to solve the oversupply problem because these industries are producing up to 30% more than the current market needs.