China should step up fiscal policy if GDP growth slows sharply: IMF

China should step up fiscal support for its economy if growth dips below 6.5% this year, or prepare to take steps to rein in credit and investment if growth surprises on the upper side, the International Monetary Fund said on Tuesday.

The IMF expects China's annual economic growth to be 6.8% this year, before slowing further to 6.25% in 2016, it said in a report.

"If incoming data suggest that growth is likely to exceed 7%, the authorities should take advantage of the opportunity to reduce vulnerabilities faster," the IMF said.

"If instead growth looks set to dip below 6.5%, then fiscal policy should be eased."

It said that fiscal stimulus, if needed, should be on-budget and rely on measures that protect the vulnerable, support rebalancing, and are consistent with the reform agenda.

The IMF said China still faced risks form unsustainable credit and investment growth and urged the government to quicken reforms, including making the yuan more flexible.

"We believe that China should aim to achieve an effectively floating exchange rate within 2-3 years," the IMF said.

China's economy grew 7.4% in 2014.

It had annual growth of 7% in the first quarter and recent data showed growth has lost further momentum into the second quarter, increasing the risk that full-year growth may dip below the government's targeted 7%.