Photo: The IMF says China should allow its economic growth to slow to 6.5 per cent next year. (Reuters)

The International Monetary Fund is calling on China’s leadership to slow economic growth by around 1 percentage point for the good of the global economy.

The IMF’s latest report on the world’s second largest economy has raised concerns over China’s rising levels of debt and need for economic reform.

Government debt in China, the report estimates, rose to around 40 per cent of GDP at the end of last year, as stimulus measures were introduced to keep growth at 7.5 per cent.

The IMF says this has been beneficial and provided a welcome lift to the global economy.

However, it is now getting worried.

It has challenged authorities to shift gears and reduce the vulnerabilities, such as debt and income inequality, that have built up.

The IMF’s mission chief for China Markus Rodlauer believes the government’s growth target should be cut.

Somewhat slower than what has been accomplished this year — we believe growth in the range of 6.5 to 7 per cent in 2015 would be consistent with moving to a safer and more sustainable growth path, he told a press briefing.

As part of this, the IMF is assuming that investment in Chinese real estate will not grow next year, after double-digit growth last year helped boost the nation’s economy.

Slower growth of bigger China won’t hurt Australia: economist

Westpac’s senior international economist, and avid China watcher, Huw McKay says he does not think that a slower Chinese growth rate is necessary.

In my view China can grow quite healthily at 7.5 per cent if that growth is coming from the right sources, but I think the IMF is correct if China is growing above 7 per cent and that growth is coming from heavy industry and industries that already have excess capacity, he said.

If Chinese authorities do pursue a slower growth rate next year, Mr McKay says it will not necessarily be disastrous for Australian exporters.

A bigger economy whose growth rate has slowed may still be providing the same volume impetus to its trading partners in the future as it was as a younger, smaller economy growing very, very rapidly, he added.

The IMF praised the government’s recent reform blueprint, but wants further action to ensure China’s economy does not pose dangers to the rest of the world.

It is calling for reforms including further strengthening regulation and supervision, the freeing up of bank deposit interest rates, increasing reliance on interest rates as an instrument of monetary policy and the elimination of implicit guarantees across the financial and corporate landscape.

The report also praised China’s efforts to enhance the quality of data but suggested further work is needed.

First posted July 31, 2014 11:30:25