China’s growth slowdown could result in a hard landing and authorities should take steps to further open up the economy, the International Monetary Fund (IMF) said as it reaffirmed forecasts that expansion would weaken to a quarter-century low.
The global impact of China's slowing economy is being felt worldwide, with commodity exporters from Angola to Australia feeling the pinch as the Asian giant switches from a high-growth investment model to one in which its increasingly wealthy consumers underpin steadier and more sustainable expansion.
But the IMF on Tuesday stressed that the task for Chinese leaders is not easy as they attempt a smooth transition following a run-up in credit and investment while allowing markets to play a bigger role in the economy.
The world's second largest economy, a crucial driver of global expansion, is suffering a sharp slowdown in growth despite government support measures including five interest rate cuts since November.
There are fears it could be headed for a so-called "hard landing." The IMF warned that such a scenario could come to pass unless leaders get a grip on the current crisis.
Under the sub-head "Hard landing in China," the report said: "There are risks of a stronger growth slowdown if the macroeconomic management of the end of the investment and credit boom of 2009–12 proves more challenging than expected."
In such a situation, the report said, authorities would be forced to ramp up policy by "shoring up investment through credit and public resources." It did not, however, offer any numerical indication of how low growth could drop in such a scenario.
The IMF tipped growth this year of 6.8 percent and 6.3 percent in 2016, both the lowest since 3.8 percent in 1990. The forecasts were unchanged from its last World Economic Outlook in April and a subsequent update in July.
Beijing's official target is "about seven percent" for this year.
Tuesday's report said authorities will likely need to increase "policy support" to boost growth, hinting at tools such as further cuts in interest rates and in bank reserve ratios.
The key, however, lies in making good on previous reform promises, it said.
"The core of the reforms is to give market mechanisms a more decisive role in the economy, eliminate distortions, and strengthen institutions," it said.
Despite concerns, the IMF said China's slowdown appears manageable as long as what it termed "previous excesses" in sectors including real estate and investment are addressed.
The report said China's economy stands to benefit from continued efforts to implement reforms, while lower prices for oil and other commodities will ease the pain for consumers.
It also said a recent huge sell-off in the stock markets is not expected to have a major impact on consumers since Chinese households do not invest heavily in equities.
"The current episode of financial market volatility is assumed to unwind without sizeable macroeconomic disruptions," the IMF said.
China shocked global markets in August with a devaluation of its currency, the yuan, and the IMF noted that the verdict on its effectiveness is still out.
"The recent change in China's exchange rate system provides the basis for a more market-determined exchange rate, but much depends on implementation," it said, indicating the country should go even further.
"A floating exchange rate will enhance monetary policy autonomy and help the economy adjust to external shocks, as China continues to become more integrated into both the global economy and global financial markets."