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Don't Panic Over the IMF's Lowered China Economic Growth Forecast

NEW YORK (TheStreet) -- So are you a 7.5% China growth person or a 7% China growth person?

Economists at the World Bank predict 7.5% growth in China next year, while their counterparts at the International Monetary Fund have lowered their 2015 forecast to 7%.

It seems like a high-quality problem for China to have.

It is very easy to become obsessed with the precise level of GDP growth in China and write commentary based on the direction of estimates, particularly because China's current five year economic plan -- which runs until 2015 -- is based on an assumption of 7% annual growth.

What increasingly matters for China, however, is what is happening underneath the headline number.

All economies need to get stronger and more efficient all the time. Economists talk about something called "supply-side reform," which basically means ensuring workers, businesses and even government can accomplish more via more education or training, lower taxes or even a shrinkage in the size and influence of government. Supply-side reform is hard enough in America, but the challenge in China is much larger given where its economy is coming from.

And this leads us to the key insight of the report from the International Monetary Fund.

The Chinese government has proved itself very adept at boosting the local economy if required, but it has tended to do this in two ways: boosting supply in the housing market or easing credit conditions.

It could quite easily use these tools again and be successful at boosting short-term growth to more than 7%.

This would be the wrong thing to do, however. China's housing market is already struggling with overcapacity, and easing credit conditions would threaten a further expansion of China's shadow banking system.

To its credit, the IMF points this out, saying "transitioning to a sustainable growth path" means potentially lower Chinese growth levels in the short term and that "pressing ahead with ... reforms" is the key for future growth beyond this year.

So do not worry about the lower IMF Chinese growth estimate. If there is anything to worry about it is the continued commitment and willingness of China's political leaders to the necessary supply-side reforms.

So far they are holding firm in their commitment to reform. These changes will continue to overhang the Chinese growth numbers and, this year or next, further reductions in the growth estimates are quite possible, but this is for the best, for China and for global economy.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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