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China economy: IMF urges Beijing to make progress on reforms

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China is at "a crucial juncture" in its development path and needs to show more urgency in reforming its economy, the International Monetary Fund (IMF) said on Thursday.

During a two-week stay in Beijing, Shanghai and Inner Mongolia, a mission from the IMF met with senior officials from the government, the People's Bank of China, as well as the private sector for discussions on the economy.

In its preliminary findings, the IMF praised Beijing for its commitment to key structural reforms, including boosting consumption and environmental protection, but warned of "uneven progress" and called for more urgency in the implementation of corrective measures.

"We see significant advances on switching from industry to services, but less on tackling credit growth; and there has been substantial liberalization of financial markets but less improvement in governance and hardening SOE budget constraints. As a result, vulnerabilities are still rising and the buffers to deal with shocks are eroding," said David Lipton, the IMF's first deputy managing director.

While recent policy support has diminished risks in the near-term, the medium-term outlook appears more uncertain amid rapidly rising credit, structural excess capacity, and the opaque financial sector, he said.

A comprehensive plan is needed to address these risks, so Beijing should consider creating a group with a clear mandate to promote and implement restructurings of state-owned enterprises (SOEs) and address the associated banking consequences, he continued.

In terms of growth, the IMF expects China to expand by 6 percent next year, versus its estimate of 6.5 percent growth this year.

Environmental policies were one arena that Beijing can tap on to boost momentum, the IMF said.

"Substantially raising taxes on fossil fuel and pollution (e.g., a carbon or coal tax) would also help make growth greener and raise revenue. Set at an appropriate rate, for example, a tax on coal would significantly reduce local air pollution and could prevent 4-5 million premature deaths by 2030."

Regarding the renminbi, Lipton noted the currency was gradually becoming more flexible and market-based following changes introduced last year, and said it encouraged authorities to continue current policies in order to achieve an effective float "within the next couple of years."

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