IMF lifts China growth forecast but warns on industrial policy

The International Monetary Fund on Wednesday raised its yearly growth forecast for China, but warned that Beijing's industrial policy risks a "misallocation" of resources and could harm trade.

The world's number-two economy has been battered in recent years by a long-running debt crisis in the property market, which accounts for a quarter of gross domestic product, while weak consumer spending and persistent deflation are also dragging on growth.

But there are some signs of recovery: growth beat forecasts in the first quarter of the year, which Beijing described as a "good start".

And the IMF said Wednesday that those figures and "recent policy measures" to lift the economy had allowed it to raise its growth forecast for the year to five percent -- in line with a target set by authorities in March.

The Fund had initially projected 4.6 percent expansion, adding that it welcomed steps in recent weeks to boost the property market.

"The ongoing housing market correction, which is necessary for steering the sector towards a more sustainable path, should continue," it said.

But, it added that "a more comprehensive policy package would facilitate an efficient and less costly transition while safeguarding against downside risks".

It also warned Beijing's strong support for strategic industries risked a "misallocation" of resources and trade blowback.

"Scaling back such policies and removing trade and investment restrictions would raise domestic productivity and ease fragmentation pressures," the latest report said.

- 'Structural reforms' needed -

Beijing has faced growing pressure in recent months to curb industrial "overcapacity", with the United States warning excessive state subsidies could flood global markets with cheap goods.

A meeting of finance ministers and central bankers from the Group of Seven world powers this month saw them vow to present a "united front" against China's alleged unfair trade practices and industrial overcapacity.

In the medium term, IMF Deputy Managing Director Gita Gopinath told a news conference in Beijing, "growth is expected to slow to 3.3 percent due to ageing demographics and slower productivity growth".

She also pointed to "significant fiscal challenges, especially for local governments", adding "sustained fiscal consolidation over the medium term is needed".

This month, Beijing cut the minimum down payment rate for first-time homebuyers and suggested the government could buy up commercial real estate -- some of its most ambitious moves yet to lift the property market out of an unprecedented debt crisis.

No details were provided on how many houses would be bought.

A number of cities, including economic powerhouse Shanghai, have also removed some curbs on buying property.

The IMF said China needed "structural reforms to counter headwinds and address underlying imbalances".

"Key priorities include rebalancing the economy towards consumption by strengthening the social safety net and liberalising the services sector to enable it to boost growth potential and create jobs," it said.