The International Monetary Fund on Wednesday lowered its forecast for China's economic growth and warned the government that it must reduce reliance on investment and drive forward a "challenging reform agenda" to sustain long-term growth.
The IMF said it expected China's economy to expand by 7.75 per cent this year after previously forecasting 8-per-cent growth.
Rapid growth in social financing "raises concerns about the quality of investment and its impact on repayment capacity," particularly as much new credit flowed through "less-well supervised parts of the financial system," it said.
"While good progress has been made with external rebalancing, growth has become too dependent on the continued expansion of investment," the IMF said in a report released after talks with Chinese officials.
Much of the investment was by the property sector and local governments, weakening their financial positions, it said.
"High income inequality and environmental problems are further signs that the current growth model needs to change," it said.
Chinese officials had reassured IMF economists that the government was committed to tackling "a challenging reform agenda that will require strong determination."
"The authorities repeatedly emphasized that they are fully aware of those challenges, as they are of the need for a decisive new round of reforms to shift the economy onto a more balanced and sustainable growth path," the IMF said.
Annual economic growth fell to 7.8 per cent last year, the slowest since 1999, as China dealt with falling export demand and rising costs, the eurozone debt crisis and uncertainty over the US economic recovery.
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