The World Bank on Wednesday projected economic growth in China to slow sharply to 2% in 2020 due to the COVID-19 pandemic before rebounding to 7.9% in 2021 as economic activity broadens.

In a report titled "From Recovery to Rebalancing," the Washington-based agency said Beijing should avoid any "significant contraction" in fiscal policy next year to keep its post-pandemic economic recovery on track despite the "precarious" global outlook.

"A premature policy exit and excessive tightening [following the pandemic] could derail the recovery," said Martin Raiser, World Bank Country director for China, urging the People's Bank of China to "proceed gradually" in tightening its monetary policy.

The World Bank said China's Gross Domestic Product (GDP) will pick up next fiscal year as consumer spending and business investment continue to catch up, along with improving corporate profits, labour market conditions, and incomes.

"China has normalized faster than expected, aided by an effective pandemic-control strategy, strong policy measures, and buoyant exports," the economic update stated. To rescue its Coronavirus-hit economy, Beijing had unleashed various stimulus measures, including the issuance of special treasury bonds, lower lending rates and tax exemptions.

The biggest risk to China's economic outlook remains a resurgence of coronavirus, the World Bank said.

"The growth outlook is predicated on the assumption that well-targeted containment efforts supported by the gradual rollout of effective COVID-19 vaccines starting in early 2021 will continue to keep new infection rates low and prevent the resurgence of large-scale outbreaks."

It urged Beijing to strengthen its "still fragile private demand," embrace "market-oriented, structural reforms" and undertake reforms to send a strong signal of its commitment to openness and globalisation.

The bank recommended that Beijing could become a part of the 11-nation mega trade deal, the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP), which President Mr Xi Jinping said he was "actively considering."

"Going forward, joining the Comprehensive and Progressive Transatlantic Trade and Investment Partnership could provide an anchor for additional reforms, as China's WTO accession did almost 20 years ago," the World Bank said.

The agency also called on China's central bank to continue its accommodative monetary stance and focus on maintaining adequate liquidity. They also called for the further opening up of China's domestic market, saying this would create more competition and facilitate the exchange of knowledge and technologies.

Even as the GDP returns to its pre-pandemic levels in 2021, the shock has "accentuated pre-existing domestic and external macroeconomic imbalances, lending additional urgency to reforms," the report notes.

While regional disparities in output, labour productivity, and income across provinces and between urban and rural areas in China have narrowed since the mid-2000s, this convergence was driven by a surge in investment in lagging regions. Mounting financial imbalances and debt, and diminishing returns make further investment-driven convergence unsustainable.

"To rebalance the economy from investment to more innovation- and services-driven growth, China will need to embrace the growth potential of its most developed and innovative metropolitan areas and city clusters," said Mr Sebastian Eckardt, World Bank Lead Economist for China.

"Such a shift will need to be accompanied by fiscal policies to ensure more equitable public service delivery and increased investment in human capital for people living outside urban areas and coastal provinces."