In a semi-annual East Asia and Pacific Economic Update, the World Bank nudged up its 2011 growth forecast for China but expects growth to moderate from next year as overseas economies slow and Beijing steers the economy to rely less on investment and manufacturing.
The lender also slashed growth forecasts for developing Asia, excluding China, due to weak export demand from developed countries and as widespread flooding hit Thailand's manufacturing base.
"While the central projection is for a gradual deceleration of growth, the risks are tilted to the downside," the development lender said, referring to China.
"Policy-makers will need to walk a fine line guarding against the short-term risks to growth and the lingering vulnerabilities associated with a still buoyant, if not overheated, economy."
China will grow 9.1 percent this year, the World Bank said, slightly higher than its previous forecast of 9.0 percent growth issued in March. In 2012, growth will then slow to 8.4 percent, the bank said.
China's growth this year is below last year's level as weakening external demand hurt investment and exports, the bank said. Monetary policy tightening also slowed investment this year, but there is now more room to normalize policy as inflation is waning, the bank said.
Reflecting recent pessimism, China's Vice Premier Wang Qishan said over the weekend that a long-term global recession is certain and China should focus on solving problems in its economy.
Policies to curb gains in land prices could put some local governments that borrowed heavily under pressure, the World Bank said.
Still, deleveraging is unlikely to match the scale of the U.S. property market as Chinese households tend to put more money down in advance and have smaller mortgages, according to the report.
Excluding China, developing East Asia will expand 4.7 percent this year, much slower than the previous forecast of 5.3 percent growth, as a slowdown in developed countries and tighter monetary policy dented growth, the bank said.
Investors shifting money out of Asian countries could lead to more stock and bond market volatility, but this could help some countries that are trying to contain asset prices, the report said.
Asian countries could also face significant spillover if a disorderly sovereign debt restructuring in Europe would hurt the flow of trade and financing, the bank said.
Public finances give many Asian countries room to boost stimulus spending if needed, but governments should focus on long-term investments to improve education, social security and labor productivity, the bank said.
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