The Chinese authorities face "many challenges" in rebalancing its economy, the International Monetary Fund (IMF) has warned today.
Conducting its annual health-check of the world's second largest economy, the IMF said China needed to step up its reforms of the unproductive state owned enterprise (SoE) sector, reform governance rules to promote financial stability and drop counter-productive growth targets.
The IMF said: "China's economic transition will continue to be complex, challenging, and potentially bumpy, against the backdrop of heightened downside risks and eroding buffers." It called on the country to "reduce the reliance on credit-financed, state-led investment, and improve governance, risk pricing and resource allocation in the SoE and financial sectors."
Members from the IMF team which inspected the Chinese economy also "highlighted the urgency of addressing the corporate debt problem [and] encouraged the authorities to harden budget constraints on SoEs."
As part of reforming the SoE sector, which analysts have long said represents a drag on the Chinese reform process, the IMF recommended winding up the most indebted firms and making the government - and some other investors - financial responsible for any losses incurred.
Figures out overnight showed the Chinese rebalancing veered off-course in July as retail sales, industrial production and capital investment all slowed.
The IMF expects growth in the Chinese economy to come in at 6.6 per cent this year, down from 6.9 per cent last year, before gradually drifting to below six per cent by the end of the decade. The Fund warned the Chinese government's obsession with growth targets let to "an undesirable focus on short-term, low-quality stimulus measures."
The government is targeting growth of between 6.5 and seven per cent this year. The IMF added: "If annual targets are to be maintained, they should be downplayed in importance."