The World Bank cut its economic growth forecast for China this year to 8.2 per cent from 8.4 per cent 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 US 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. – Reuters