“The near-term growth outlook has turned more buoyant due to recent policy support,” said David Lipton, first deputy managing director of the IMF at the end of a visit to Beijing, according to a copy of his prepared remarks provided to Reuters.
“The medium-term outlook, however, is more uncertain due to rapidly rising credit, structural excess capacity, and the increasingly large, opaque, and interconnected financial sector.”
Last year, China’s economy grew at its slowest pace in a quarter of a century, due to weak demand at home and abroad, cooling investment, and overcapacity, particularly in industries such as steel and coal.
Analysts say government efforts to stimulate activity and hit growth targets are driving up debt levels, raising concerns about dangers to the country’s banking system, which has seen non-performing loans hit 11-year highs.
The IMF expects China’s economy to grow by around 6% in 2017. Beijing has set a goal of at least 6.5% growth over the next five years, though some analysts believe real growth levels are already much weaker than official data suggest.
China also needs to align local government revenue and expenditure responsibilities, expand social security, implement new budget laws and make the tax system more progressive, Mr Lipton said.
The IMF also suggests implementing a carbon or coal tax, which would significantly reduce China’s serious air pollution problem and could prevent 4m-5m premature deaths in 2030.
In addition to fiscal reform, Mr Lipton said China needs to guard against growing risks in its increasingly complex financial system by increasing coordination between different regulators and markets and strengthening funding resilience for both banks and other financial institutions.