China's economic growth is expected to weaken to 7.8 percent this year, the International Monetary Fund said on Tuesday as it warned of risks to emerging Asia if the euro zone crisis worsens and the United States does not avoid its "fiscal cliff".
However, the IMF said several Asian countries had fiscal room to support their economies if needed and it reiterated a long-standing view that some regional countries, including China, have weaker currencies than desirable.
The IMF sharply lowered its forecasts for India and predicted "less buoyant" growth in the near- and medium-term for Asia as a whole, cautioning any cool down in China's investment surge will add to the drag on regional and German manufacturers.
"The balance of risks to the near-term growth outlook is tilted to the downside," the Fund said in its semi-annual World Economic Outlook.
It predicted China's economy, the world's second-biggest, will "soft land" by growing 7.8 percent this year and 8.2 percent next year, boosted by interest rate cuts in June and July. Beijing has targeted growth of 7.5 percent this year.
In July, the IMF had forecast 2012 growth of 8 percent and 2013 expansion of 8.5 percent.
"In the short term, a further escalation of the euro area crisis and failure to address the U.S. fiscal cliff are the main external risks," the Fund said.
Europe and the United States are the two biggest buyers of China's exports, which are growing at a single-digit pace — the weakest in three years — as western shoppers tighten their belts.
The IMF's China forecast has fallen into line with private sector economists. A September poll by Reuters showed they expect the world's growth engine to grow 7.7 percent this year, its weakest in 13 years.
The economic headwinds for Asia could worsen, the IMF said. The U.S. economy could sink into recession if congress does not avert a "fiscal cliff" of automatic tax rises and deep federal spending cuts before a year-end deadline.
In that vein, the IMF said China, South Korea and emerging nations in Southeast Asia have room to loosen fiscal policy and shore up economic growth, if needed.
Beijing is already loosening fiscal policy at the margins. Since May, it has accelerated more than $150 billion worth of state spending on infrastructure.
But analysts have warned that China's addiction to heavy investment as a means of supporting growth is not sustainable in the long run if it wants to rebalance its economy towards domestic consumption.
Investment accounted for half of China's economic growth in the first-half of this year.
The IMF said India, Asia's third-largest economy, is expected to grow 4.9 percent this year, down from a forecast in July of 6.1 percent. It pencilled in 6 percent growth next year, compared to an earlier 6.5 percent projection.
It cited red tape, weakening business sentiment, a rising current account deficit and rupee depreciation for the cuts in forecasts.
And unlike the rest of Asia, where inflation is expected to fall, the IMF said price pressures in India were elevated.
"Monetary policy should stay on hold until a sustained decrease in inflation materializes," it said.
The central bank left interest rates on hold in September after wholesale price inflation rose to 7.55 percent in August.
Expectations for a twin slowdown in China and India led the IMF to shave its growth projections for developing Asia to 6.7 percent from 7.1 percent in July. The growth forecast for next year was trimmed to 7.2 percent from 7.5 percent.
Softening growth aside, the Fund also urged Asian countries to guard against domestic imbalances that stifle local consumption and obstruct a rebalancing of the global economy.
It cited five countries — China, South Korea, Malaysia, Singapore and Thailand — as being guilty of running stronger trade surpluses and weaker currencies than desirable.