* IMF keeps 7.75 pct growth forecast
* Labour market remains stable - IMF
* Risks from shadow banking, local government debt
BEIJING/WASHINGTON, July 17 China needs another
round of "decisive measures" to make sure it continues its
successful economic growth as its margins of safety are falling
amid growing domestic problems, the International Monetary Fund
said in its latest report.
The world's second-largest economy has been underpinned by a
mix of investment, credit and fiscal stimulus, but such a
pattern of growth is unsustainable, the fund said on Wednesday
in a report on its annual review of China's economy.
"To secure more balanced and sustainable growth, a package
of reforms is needed to contain the growing risks while
transitioning the economy to a more consumer-based, inclusive,
and environmentally friendly growth path," the report said.
"While China still has significant buffers to weather
shocks, the margins of safety are diminishing."
The IMF did not change its latest forecast for 2013 Chinese
growth at 7.75 percent, though it noted downside risks to the
forecast. Its figure is above the Chinese government's target of
7.5 percent and also above most private economists' forecasts of
between 7 and 7.5 percent.
China's new leaders have repeatedly indicated that they are
prepared to tolerate slower growth to push through reforms and
deregulation to wean the economy off a reliance on exports and
investment and encourage more consumption.
That resolve has been tested, however, as growth slowed to
7.5 percent in the April to June quarter, the ninth quarter in
the last 10 that expansion has weakened, and exports fell in
June for the first time in 17 months.
Analysts have suggested that the government may step in if
growth falls to 7 percent or below in any quarter, though it is
unclear where the government's bottom line would lie.
The IMF said it was less worried about specific growth
figures, as there were few signs of a sharp slowdown or "hard
"We think another (government) stimulus would be warranted
only if growth were to slow considerably more," Markus Rodlauer,
the IMF's mission chief for China, told reporters.
The IMF also welcomed the government's move to shift more
jobs into the services sector, which must take up a growing pool
of labour. Services jobs generally have higher wages, helping
China's transition to a consumption-led economy. China must
continue the process of de-regulating the sector, the fund said.
Steven Barnett, the IMF's division chief for China, said the
share of employment in the services sector remains below other
countries' at comparable income levels - although it has been
But Barnett agreed with China's government that labour
conditions remain stable, with a steady unemployment rate and
wage growth, according to official statistics.
China's leaders have been at pains to say employment remains
stable, even as the economy slows, citing a growing services
sector and a demographic shift that reduces surplus rural
workers. They are worried that if the slowdown leads to high
unemployment, there could be social unrest.
The IMF said that for the near term, a priority for China is
to rein in broader credit growth and prevent a further build-up
of risks in the financial sector.
It noted the rise of China's shadow banking system, where
credit is available outside regular channels to companies that
cannot borrow from banks, but which risks creating hidden bad
debts that become a threat to financial stability.
Banks could be vulnerable in the future if asset qualities
should worsen. The IMF's Rodlauer said the fund was not yet
concerned about the problem's systemic risks.
"We're not there yet in terms of size, or ... any sort of
crisis proportions," he said, adding that it was important to
address the issue in the long-run and remove incentives to go
around formal banking rules.
The significant expansion of local government debt levels in
recent years is another cause for concern. The IMF for the first
time estimated that local government debt was 45 percent of GDP
last year, including funds not counted in the official budget,
but without taking into account the debt of state-owned firms.
The fund said China's agenda should include accelerated
financial sector reforms, a revamp of local government finances,
a more market-based currency exchange rate with less
intervention, opening more markets to competition and
liberalising the capital account.
"With a successful transition, China will grow at a healthy
pace for years to come," the report said. "Activity may be
somewhat slower, a trade off worth making for the benefit of
much higher income in the medium to long run -- a growth
trajectory that will also be good for the global economy."