China growing strongly, risks manageable : OECD report

China's economy should expand by 8.5 percent in 2013 and more in 2014, with inflation and export demand the biggest near term risks to growth that should average 8 percent in this decade at current rates of investment and reform, the OECD said on Friday.

The Organisation for Economic Co-operation and Development (OECD) offered one of the most upbeat assessments of China's prospects of any of the major multilateral institutions in its new Economic Survey of China, which was unveiled in Beijing.

The 161-page survey, the first such report from the Paris-based OECD since 2010, was particularly optimistic about the outlook for investment spending in the world's No.2 economy.

It pointed to substantial deficits in rail and road capacity relative to other major economies at similar stages of development, as well as to sub-standard housing as offering scope for more profitable spending on infrastructure.

"The level of investment in the private sector is well-founded by the rates of return, and in infrastructure, we still think there are tremendous needs," Richard Herd, the head of the OECD's China desk, told a media conference.

"We're positive on investment in the sense that we see rates of return remaining quite high," he added.

Many private sector economists believe China's GDP growth by the end of this decade will be nearer 5 percent than the 10 percent average annual rate it has hit for the last 30 years.

China's official growth target for 2013 is 7.5 percent and 7 percent on average in the five-year plan that runs to 2015.

Growth slowed to a 13-year low of 7.8 percent in 2012, with weak demand in the European Union and the United States -- the two biggest export customers -- the main drag on growth.

"Recent OECD simulations suggest that China could maintain high, though gradually easing, growth during the current decade, averaging 8 percent in per capita terms," the report said, adding that the country was on course to become the world's largest economy by 2016, adjusted for price differences.

The OECD said soggy export demand was the biggest potential external risk to its 2013 growth forecast and a pick-up in inflation was the biggest domestic risk factor to maintaining a policy mix that has underpinned an economic recovery in China that took hold in the fourth quarter of 2012.

Herd said official economic data so far in the first quarter of 2013 supported the OECD's above-consensus growth call, with domestic consumption -- key to Beijing's economic rebalancing strategy to wean the economy off of exports and investment -- faring well with wages ticking higher and inflation subdued.

He played down the concerns about heavily-indebted local governments, saying that in the overall context of a central government with big cash reserves, large fiscal flexibility and the potential for Beijing to take direct ownership of troubled local government assets, China's financial system was strong enough to easily absorb potential trouble.

The report, which focused on the growth prospects and risks offered by China's renewed urbanization drive as well as relations between local and central governments and pollution, said that further economic reform was crucial to ensure growth was sustained longer term.

"To sustain vigorous and socially inclusive growth over the longer run, renewed reform momentum is required," it said, pointing to financial market liberalization and increased competition in the services sector as key areas of focus.

(Reporting by Nick Edwards; editing by Jonathan Standing)