BEIJING - China's growth will moderate in the medium term as the economy continues to rebalance gradually, while policy responses should focus on risks including shadow banking and local government debt, the World Bank said on Friday.

China's economic growth is expected to slow marginally to 7.6 percent in 2014, and 7.5 percent in 2015, from 7.7 percent in 2013, according to the World Bank's latest China Economic Update report.

China's economic rebalancing is welcome but it will not be a smooth process. However, China's labor market remains strong, helping maintain growth in income and jobs, Chorching Goh, lead economist for China, said at a press conference held in Beijing to release the report.

Risk control crucial to growth

World Bank pares 2014 outlook

"The rebalancing will be uneven, reflecting tensions between structural trends and near-term demand management measures," she said.

China's economic growth slowdown in the first quarter reflected a combination of dissipating effects of earlier growth-support measures, a subdued external environment and tighter credit, especially for real estate activities. In recent months, economic activity, including industrial production, has started to show signs of acceleration, noted the report.

China's economy grew at its weakest pace in 18 months in the first quarter of 2014, expanding by 7.4 percent. The report, a regular assessment of China's economy, identifies several risks to China's gradual economic adjustment.

First, it warns that disorderly deleveraging of local government debt could trigger a sharp slowdown in investment growth. Second, an abrupt change in the cost of, or access to, capital for such sectors as real estate could significantly reduce economic activity. Finally, the recovery in exports may not materialize if growth in advanced countries weakens.

The World Bank suggested that policy responses to these medium-term risks should center on fiscal and financial sector reforms, which were part of the government's reform agenda outlined in November 2013. These include effectively managing and supervising rapid credit growth, especially in the shadow banking system, and gradually reducing local government debt.

"The proposed reform measures are structural in nature. In the medium term, these policy measures will improve the quality of China's growth -- making it more balanced, inclusive and sustainable and lay the foundation for sound economic development, " said Karlis Smits, main author of the report.