China's big trading partners worry that its rapid economic growth cannot be sustained and it could suffer a hard landing that spreads damage around the world, according to an IMF report released on Thursday.
In its first China spillover report, designed to examine how domestic policies in major economies affect the rest of the world, the IMF said that allowing the yuan currency to rise more rapidly was important for global stability.
But a stronger yuan on its own would yield only limited benefits to the rest of the world, the IMF said, so it must be accompanied by policy shifts to promote domestic demand, especially steps to reduce household and corporate savings.
The spillover reports are part of a Group of 20 agreement forged in the aftermath of the 2008 financial crisis to bolster economic cooperation and encourage policies that make the world less vulnerable to crises.
The G20 asked the IMF to conduct regular reviews of major economies -- China, the euro area, Japan, Britain and the United States. Its reports on the euro zone and Japan were released earlier this week.
The IMF asked China's key trading partners about their concerns regarding China's domestic policies. Sustainability of China's rapid growth was the first issue.
The concern is that overheating in China could put added pressure on commodity prices and draw short-term capital to the region, the IMF said in its report.
The partners also worried that continued high investment in China could create excess capacity. Given uncertain demand prospects in advanced economies, that could risk a hard landing that reverberates beyond China.
As a trade powerhouse, China can transmit economic shocks widely, whether they originate domestically or elsewhere, the IMF said. It is also becoming large enough to be the source of shocks that affect the world.
The caricature of China as merely a cog in the global supply chain.... is changing, the IMF wrote. This means China's capacity to originate shocks has risen.
The IMF said China's authorities welcomed the spillover analysis but considered worries about a hard landing overstated. Beijing emphasized that the rest of the world must also do its part to ensure stability.
While stable growth in China will continue to support the global recovery, instability elsewhere has complicated the task of rebalancing China's economic structure, the report said in a section entitled authorities' reactions.
The tide of trade complaints attending the global recession and unemployment also can disrupt the process, and calls into question the commitment to globalization.
China also said a rapid rise in the yuan's value would have large deleterious effects on exporters and the economy, with related negative spillover effects on the output of partners.
The IMF also looked at what would happen if China opened up its relatively closed capital markets but the report was inconclusive on whether more investment money would flow into, or out of, the country.
Chinese savers have few investment options. Bank savings carry low yields, and the domestic stock market is volatile. That has pushed investment toward the property market, where the IMF has raised concerns about an asset price bubble.
Opening up the financial market could mean those domestic savers rush to invest abroad.
Such outflows could exceed the presumed body of capital waiting to pour into China, the IMF said.
(Reporting by Emily Kaiser; Editing by Vidya Ranganathan)