IMF sees positive outlook for Chinese economy

China's near-term growth outlook has improved due to recent policy support but the country needs to rein in fast credit growth to ensure economic transition on a sustainable footing, the International Monetary Fund (IMF) said Friday.

The Chinese economy is expected to grow 6.6 percent this year, with the inflation rate rising to 2 percent, the IMF said in a report after concluding its annual economic health check on the Chinese economy.

"We have a positive view of China's growth outlook as China continues to mobilize its very considerable resources and catches up with higher-income economies," said James Daniel, IMF mission chief for China.

"Many countries could only dream of achieving growth rates that China has and is likely to achieve, which also reflects positively on the reforms that Chinese policymakers have undertaken," said Daniel.

The IMF expected that China's economic transition will continue and will be positive overall for the global economy.

According to the report, China's internal and external imbalance is expected to fall gradually due to aging and a stronger social safety net. Household consumption is expected to continue to pick up on the back of falling household savings and rising disposable income.

The IMF report also noted that the Chinese currency, the Renminbi, is broadly in line with fundamentals, and welcomed China's steps toward an effectively floating exchange rate region.

Despite the relatively benign near-term outlook, downside risks dominate, including rapid credit growth and slow progress on reform, said the IMF.

In order to reduce vulnerability, China's policy priority is to slow credit growth, which can be done by tackling its root causes: soft budget constraints on state-owned enterprises and local governments, and the implicit government guarantees and excessive risk taking in parts of the financial sector, said Daniel.

According to the IMF report, Chinese authorities agreed that China's corporate debt has risen excessively. But they pointed out that China's large pool of domestic savings, ample banking system buffers, and ongoing equity market development would facilitate a smooth adjustment.

Chinese authorities expected growth to remain in the range of 6 to 7 percent, which was sustainable considering the potential for restructuring, upgrading and convergence in less developed regions.