IMF cuts China growth forecast to 7.75% in '13

China's economy is expected to expand at around 7.75 percent in 2013, according to the IMF's latest assessment. This is lower than its April forecast of 8 percent.

David Lipton, first deputy managing director of IMF, said, "While good progress has been made with external rebalancing, growth has become too dependent on the continued expansion of investment, much of it by the property sector and local governments whose financial position is being effected as a result."

China's 2012 economic growth of 7.8 percent was its slowest in 13 years and came amid domestic weakness and major headwinds from overseas markets. The government's official growth target is 7.5 percent.

The IMF says that China is facing key challenges, especially the rapid growth in total social financing which is raising concerns about the quality of investment and its impact on the repayment capacity. It also says the high income inequality and environmental problems are adding further pressures.

Markus Rodlauer, Deputy Director of the IMF's Asia and Pacific Department, however says that the pace of the economy should pick up moderately in the second half of the year, thanks to credit expansion and a mild recovery in the global economy.

Markus Rodlauer said, "We do expect a mild recovery of economic activity in the coming months which will also be supported by what we expect externally for the global economy, which is a mild rebound in the global economy, particularly in the US."

The IMF kept its annual inflation projection for China unchanged at 3 percent for this year, and forecasts the external current account surplus to remain broadly at around 2.5 percent of GDP.

Markus said, "As long as productivity supports the wage growth we are not concerned about inflationary pressures. The challenge going forward will be to continue to produce the productivity improvements that will support wage growth because if there is wage growth without productivity that would produce inflationary pressures but in the near-term we do not see those pressures."

The IMF says stronger governance especially in banks, state-owned enterprises and local governments, as well as rebalancing toward higher household incomes and consumption are needed to push ahead the reform agenda.

The fund also urged continued progress with interest rate liberalization and greater exchange rate flexibility.