China's growth will plummet by 6.5 percent in 2016 and further reduce to 6.3 percent in 2017, according to the annual economic outlook released by the Asian Development Bank (ADB) on Wednesday, further cautioning the country's huge industrial overcapacity.

"Weak external demand and excess capacity in some sectors, on top of a shrinking labour force and rising wages, continue to induce a gradual decline in China's growth rate," Shang-Jin Wei, chief economist from ADB, said during the release of Asian Development Outlook 2016 report.

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In 2015, the country's economy rose by 6.9 percent, the lowest annual expansion China has experienced in a quarter of a century. It targets to achieve a 6.5 to 7 percent growth rate in 2016.

"Supply-side reforms, including improving labour market flexibility, are needed to improve the economy's resilience to negative shocks and raise its potential growth," Wei said.

The steep decrease of investment including the real estate and capital-intensive sectors will continue to pull the economy down, but this will partially be neutralized by other government expenditures like infrastructure and green investment.

Risks posed include a weak global demand, fluctuating financial market and drop of global commodity prices. But a weakening consumer sentiment plus the increasing bad loans will sap economic performance, the multilateral bank said.

"The national government's more gradual approach to reducing production capacity, and its encouragement of mergers rather than bankruptcies in state companies, is helping to avoid a more extreme fallout from rebalancing the economy," it said.

China plans to cut down 10 percent production capacity in the steel and coal sector over the next five years. However, analysts believe this move is not enough as the industry is producing up to 30 percent of the current market needs.

Tagschina, Asian Development Bank, Asian Development Outlook 2016, China growth, economic growth, economic slowdown