IMF raises China’s growth forecast to 6.7%, but warns against high debt

China's economy is looking good enough for the International Monetary Fund to raise its growth outlook to 6.7 per cent from the earlier 6.2 per cent, but warned the world's second-largest economy over its growing debt.

The IMF issued its annual review of China on Tuesday, and has revised its growth forecast to 6.7 per cent for 2017, which was up from 6.2 per cent. The organization also said it expects China to average 6.4 per cent growth between now and 2021, against its previous estimate of 6 per cent.

China continues to transition to a more sustainable growth path and reforms have advanced across a wide domain. Growth slowed to 6.7 per cent in 2016 and is projected to remain robust at 6.7 per cent this year owing to the momentum from last year's policy support, strengthening external demand, and progress in domestic reforms, IMF stated in its annual review of the Chinese economy.

Inflation in China rose to 2 per cent in 2016 and is expected to remain stable at 2 per cent in 2017, IMF said, even as it noted that China has taken important supervisory and regulatory action against financial sector risks, and that corporate debt is growing more slowly, reflecting restructuring initiatives and overcapacity reduction.

Fiscal policy, however, remained expansionary and credit growth remained strong in 2016, it noted.

IMF expects growth momentum of the Chinese economy to likely decline over the course of the year, reflecting recent regulatory measures which have tightened financial conditions and contributed to a declining credit impulse.

China's current account surplus fell to 1.7 per cent of GDP in 2016, driven by a sharp recovery in goods imports and continued strength in tourism outflows. It is projected to further narrow to 1.4 per cent of GDP this year, due primarily to robust domestic demand and a deterioration in terms of trade.

Capital outflows have moderated amid tighter enforcement of capital flow management measures and more stable exchange rate expectations. After depreciating 5 per cent in real effective terms in 2016, the renminbi has depreciated some 2.75 per cent since then and remains broadly in line with fundamentals, IMD stated in its review.

The IMF board noted that China's continued strong growth has provided critical support to global demand. It commended China's ongoing progress in rebalancing its economy toward services and consumption. It noted that economic activity had recently firmed and saw this as an opportunity for the authorities to accelerate needed reforms and focus more on the quality and sustainability of growth.

IMF also said it is important for China to reduce national savings to help prevent domestic and external imbalances even as it emphasized the need for greater social spending and making the tax system more progressive.