IMF sticks to 7.75% growth target for China

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The International Monetary Fund is sticking to its somewhat bullish forecast for China to grow 7.75 percent this year, but warned that policy makers must urgently address imbalances in the economy to avoid future shocks.

In the body's annual report on the Chinese economy, it urged Beijing to push ahead with another round of "decisive measures" to ensure that the country transitions from an investment-led economy to a more consumer-focused and environmentally friendly one.

It said that Chinese policy makers have the resources to control any potential shocks to the economy but these means were limited, it said.

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"While China still has significant buffers to weather shocks, the margins of safety are diminishing," the report said.

Monday's official gross domestic product (GDP) data confirmed that growth in world's second largest economy was slowing. The nation grew 7.5 percent in the second quarter from a year earlier, down from the 7.7 percent on year pace logged in the first quarter.

The IMF's 7.75 percent forecast for 2013 is above the government's forecast of 7.5 percent and decidedly more bullish than many analysts' increasingly bearish targets ranging from around 7 to 7.5 percent.

Bearish views on China have increased in recent times, amid a wide range of concerns including weakening economic data, fears of a cash crush in the country's interbank lending market, an ongoing problem with non-bank lending (shadow banking) and soaring local government debt levels.

Markus Rodlauer, mission chief and deputy director for China and Asia Pacific at the International Monetary Fund, told CNBC on Thursday that China's economy was safe from a crisis for now, although growth risks are increasing.

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"We have looked carefully at the risks in the China economy, and we focused on financial risks in the banking sector and the fiscal risks in local government spending ... these risks have increased significantly, even though they have not yet reached crisis proportions," said Rodlauer.

"There are significant margins to address any shocks, but going forward these risks need to be addressed to contain the building problems," he added.

In its report the IMF pointed to a number of risks which could derail Chinese economic growth.

A top priority in the near-term was to rein in broader credit growth and prevent a build-up of risks in the financial sector, the body said.

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Analysts have long been concerned about the rapid influx of bad debt in China's economy, amid a rise in 'shadow banking' - non-bank lending which is unregulated and involves high interest rates.

The IMF urged China to address its shadow banking issue, along with the issue of rapidly rising levels of local government debt.

"There is an underlying imbalance in the resources that local government have and the spending commitments they have, and as a result we have had all this financing through platforms in a fairly un-transparent way. The re-ordering local government finances is very important in China," added Rodlauer.

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In terms of reform, the IMF said China needed to accelerate the reform of its financial sector, and speed up the liberalization of its currency and its capital account. On the structural side, many state-owned sectors needed to be fully opened up.

Some analysts have recently speculated that the Chinese government could step in to stem China's slowing growth through stimulus. But the IMF ruled out such a scenario.

"We are confident that they will reach this year's target of 7.5 percent or maybe even higher. There is no risk of a sharp slowdown in China, no need for massive stimulus by the government," he said.

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But if China fails to address the imbalances in the economy growth could hypothetically fall as low as 4 percent over the next seven years, said Rodlauer, who reiterated that this was not the IMF's base case scenario.

"If the economy fails to redirect towards less investment and credit dependent growth then there is a risk that these imbalances that have been growing, grow further and that in the future will coincide with some shock that unravel the whole thing in a disorderly way... in a scenario we have modeled it would come down to 4 percent," he said.

The IMF said China will grow 7.7 percent in 2014.

—By CNBC's Katie Holliday: Follow her on Twitter: @hollidaykatie