Washington - China should take steps to rein in runaway economic growth or face the possibility of a "boom-bust cycle," the International Monetary Fund said.

In its annual assessment of the Chinese economy, the IMF also said that many of its analysts consider it "appropriate" for Beijing to stick with a policy of promoting "gradual and controlled" exchange rate movements.

The IMF report said that despite some calls for an acceleration of exchange rate flexibility, many IMF officials share Beijing's concern that such a move could have "an adverse impact on macroeconomic stability."

IMF directors "commended the authorities for sustaining high economic growth and noted that China's prospects for the future remain favorable, provided that the risks and challenges faced by the country are addressed," the report said.

The report also "endorsed the governments medium-term economic reform strategy, particularly the need to rebalance the economy away from heavy dependence on investment and exports for growth towards consumption."

IMF staff are projecting economic growth in China to remain "around 10 percent" in 2006, but only if authorities take steps to check investment.

"Unless these policy actions are taken, GDP growth could easily exceed the 10 percent forecast," the report said.

"In the near term, a significant risk remains that macroeconomic policies will not be sufficiently tight to contain investment growth. In particular, there is a need for monetary policy to prevent a surge in credit growth from tipping off a boom-bust cycle and an associated rise in banks' nonperforming loans."

The Chinese economy grew at a blistering 10.9 percent pace in the first six months of 2006, well above the government's full-year target of about eight percent.

Chinese vice premier Zeng Peiyan said Sunday the government would continue to improve its macroeconomic controls but would focus on "economic and legal measures," to restrain growth.

In the currency area, since China de-linked its currency from a decade-long peg to the dollar in favor of a basket of currencies, the yuan has strengthened by about two percent.

Washington, who put blames of its soaring trade deficit on Beijing's Yuan policy, has pressed China for more Yuan reforms and threatened to impose punitive duties.

China meanwhile promised a gradual reform and argued that the country's fragile financial system cannot yet handle the volatility of a freely floating exchange rate.

"Many (IMF) directors found it appropriate for China to continue to allow greater flexibility in its exchange rate in a gradual and controlled manner," the report said.

"They shared the authorities' concern that accelerating exchange rate flexibility could have an adverse impact on macroeconomic stability. Some of these directors also viewed that exchange rate adjustment alone would have a limited impact on external balances.

"A number of other directors, however, stressed that the flexibility afforded by the current exchange rate system should be used more extensively."

The IMF officials "noted that greater exchange rate flexibility, along with other policy changes and reforms in China, will aid in rebalancing the economy over the medium term, and will contribute to the orderly resolution of the global current account imbalance."

The issue has become tied up with debate about reform of the IMF, which holds its annual meeting with the World Bank in Singapore on September 19-20.

With US support, IMF members are expected to adopt an interim voting reform to give a greater say to four countries, including China.

The IMF report appeared to back Beijing's position on this, although there was some internal debate about the role of the yuan in global trade imbalances.