IMF sees China slowdown risks, urges Beijing to float yuan

BEIJING (Reuters) - China's policymakers should forge ahead with structural reforms to put the world's second-largest economy on a more sustainable footing, even as growth is likely to slow further to 6.3 percent in 2016, the International Monetary Fund said on Tuesday.

The IMF expects China's growth to slow to 6.8 percent this year from 7.3 percent in 2014, and weaken further in 2016, maintaining its existing forecasts.

"Modest further policy support to ensure that growth does not fall sharply is likely to be needed, but further progress in implementing the authorities' structural reforms will be critical for private consumption to pick up some of the slack from slowing investment growth," IMF said in its World Economic Outlook.

The government has been steadily ratcheting up its policy support, including cutting interest rates and increasing fiscal spending, in a bid to put a floor under the economy, which is on track to grow at its weakest pace in a quarter of a century.

The government is aiming for growth of around 7 percent in 2015, though some economists believe current levels could already be much weaker.

Beijing faces a tough balancing act in preventing a sharp slowdown, reducing vulnerabilities from excess leverage and strengthening the role of market forces in the economy, the IMF said.

The credit and investment boom, fanned by Beijing's massive stimulus package implemented during the height of global financial crisis, resulted in heavy debt among local governments and widespread factory overcapacity.

"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," the IMF said.

The IMF reaffirmed its calls for China to press ahead with market-based currency reforms, following the country's surprising move to devalue the yuan in August.

"The recent change in China's exchange rate system provides the basis for a more market-determined exchange rate, but much

depends on implementation," the IMF said.

"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."

China has described the yuan devaluation as modest and part of reforms to make the currency more market-driven, which coincided with the country's push to have the yuan included in the IMF's Special Drawing Rights (SDRs) basket.

But the move spooked financial markets, as investors feared it could lead to competitive devaluations which could destabilize the fragile global economy.

Chinese officials have pledged to push financial reforms to make the yuan more convertible as they seek to win the IMF's approval for the yuan's inclusion into SDRs.

However, the central bank has intervened heavily to support the yuan since the devaluation, alongside massive government efforts to stem a slide in the stock market.

The IMF board is scheduled to decide in November whether the yuan will join the Special Drawing Rights basket.

(Reporting by Kevin Yao; Editing by Kim Coghill)