BEIJING (Reuters) - The International Monetary Fund (IMF) cut its 2015 economic growth forecast for China to about 7 percent, but urged authorities to avoid further stimulus measures and concentrate on curtailing financial risks instead.
In remarks that projected confidence about the near-term health of the world's second-biggest economy, the IMF said Beijing must keep its word on implementing reforms that will correct imbalances, including a "moderately undervalued" yuan.
Specifically, the fund said conditions are right for China to take the next step in freeing its interest rates market, challenging the view among some senior Chinese officials that the country is not yet ready for such a move.
"We are not counselling stimulus at this point," IMF's First Deputy Managing Director David Lipton told reporters in Beijing, when asked if he thought China's government should do more to shore up flagging economic growth.
"We don't think there are sufficient signs that would warrant that."
Rather, he said the bigger threat to China is its persistent reliance on debt and investment in areas such as real estate to power its economy, weaknesses that are growing and which will hurt it in the long run if they are not corrected.
So unless China's economy is at risk of missing the government's growth target of about 7.5 percent this year by a substantial margin, Lipton said more stimulus is unwarranted.
"Vulnerabilities have risen to the point that containing them should be a priority," he said, noting that the IMF believes China can hit its economic growth target for 2014.
For next year, the fund lowered its economic growth projection from April's 7.3 percent to around 7 percent -- a level that Lipton said is realistic if China were to carry out extensive financial reforms, as it promised to.
Beijing has announced a series of modest stimulus measures in recent months after the economy got off to a weak start this year. Business surveys in the last week signal activity may be starting to stabilise but a slight pick-up in parts of the economy does not mean a solid, broader recovery is under way.
The economy's lacklustre performance has stirred speculation that the government may act more forcefully to shore up activity, even though Beijing has ruled out any big policy moves to counter short-term dips in growth.
MODEST DEBT, BUT RISING
China has vowed to embrace comprehensive reforms that are likely stifle activity in the near term, in order to re-orient its economy and let domestic consumption replace exports and investment as the mainstay sources of growth.
Experts say the painful transition is necessary if China wishes to break into the ranks of high-income economies.
Of the needed changes, the IMF highlighted tax and fiscal reforms, an insurance for deposits and a removal of state control over deposit rates.
It said authorities must also increase their tolerance of corporate defaults and bankruptcies, and intervene less in the currency market to interfere with the value of the yuan.
"Conditions are right for the next step in deposit rate liberalisation," Lipton said, adding that some limited insurance for deposits should be established as soon as possible.
China restricts how much banks pay savers for their deposits in part to protect bank profits, a move analysts say distorts economic reality and encourages wasteful investment by artificially lowering the cost of credit.
But Yi Gang, a deputy governor at China's central bank, was quoted by the Chinese media as saying in April that China is not ready to allow markets to determine interest rates.
He said this is because local governments can use their political power to force banks to lend to them regardless of the level of interest rates. Furthermore, a free rates environment would inevitably lift borrowing costs, increasing the burden on firms at a time when China's economy is already struggling.
(Reporting by Koh Gui Qing; Editing by Kim Coghill and Simon Cameron-Moore)