China should maintain some policy support for the economy this year, but steps are needed to spur private demand and achieve more balanced growth over the medium term, the International Monetary Fund said on Friday.
The world's second-largest economy is likely to grow 7.9% in 2021, accelerating from expected 1.9% growth in 2020, the IMF said in the conclusion of its annual economic consultation with China.
China should keep "moderately supportive fiscal and monetary policies until the recovery is on solid ground," the IMF said, although fiscal consolidation will be needed in the medium term to ensure debt sustainability.
It said China's fiscal, monetary, and structural policies should aim to strengthen private demand to allow more balanced medium-term growth.
China should also improve its macro-fiscal framework and modernise its monetary policy to strengthen the transmission of interest rate policies, the IMF said.
The economy has been recovering from a virus-induced slump in early 2020, but the recovery remains uneven, as consumption and private investment trails state spending and exports.
China's central bank will reduce economic support in 2021 and cool credit growth, but fears of derailing the recovery are likely to prevent it from tightening soon, policy sources have said.
Chinese authorities have rolled out measures including increased fiscal spending, cuts in interest rates and reserve ratios since early 2020 to support the virus-hit economy. The stimulus has pushed up debt levels.
To spur consumption, China should improve its social safety nets to reduce precautionary savings and address income inequality, the IMF said.
China should also restructure its banking sector to allow the orderly exit of weaker banks and deepen state-sector reforms to ensure competitive neutrality between state-owned and private firms, the IMF said.
"Structural reform will be key to boosting potential growth, reduce external imbalances, and build a more resilient, green, and inclusive economy," it said
The 1.9% expected growth would make China the only major economy to grow in 2020, albeit at the slowest annual pace since 1976, the final year of Mao Zedong's Cultural Revolution.
Core inflation, a gauge of underlying demand, is expected to remain subdued, the IMF said, leaving consumer inflation in 2020-21 below the pre-COVID crisis target of about 3%.
The current account surplus is projected to widen to 1.9% of GDP in 2020 from 1% in 2019, before narrowing to below 1% in 2021, the IMF said. The temporary increase reflected lower commodity prices, a collapse in outbound tourism and a surge in exports.