IMF urges China to implement critical economic reforms The International Monetary Fund has warned that time is running short for China to implement critical economic reforms as the government, banks and companies come under mounting strain from rapid and unbalanced growth. In its annual report on the Chinese economy, the IMF sounded a more cautionary note than previously. It said it was "increasingly urgent" for China to shift away from its growth model which relies heavily on credit and investment. It said the model was "not sustainable and is raising vulnerabilities" and that "while China still has significant buffers to weather shocks, the margins of safety are diminishing." China's new leaders, who took the reins in March, have vowed to step up reform efforts, but have yet to make any significant moves. The IMF said a "round of decisive measures" was necessary to ensure the economy's continued success, adding that the immediate priority was to "rein in broader credit growth and prevent a further build-up of risks in the financial sector." China's stock of total social financing - a measure of total credit in the economy - has increased by more than 60 per cent since the start of 2009, an indication of rising leverage that is weakening balance sheets. The IMF said it was particularly worrisome that a substantial portion of this credit was being routed through the non-traditional - or shadow - financial system. "Together with a slowing of growth, it begs the question of whether this is a sustainable way forward," Markus Rodlauer, deputy director of the IMF's Asia department, told the Financial Times. In June, China suffered a cash crunch when the central bank withheld liquidity injections, triggering a rise in interbank rates and a brief freeze of credit markets. The IMF said the squeeze signalled the bank's intention to contain credit expansion and rein in riskier forms of lending. But Mr Rodlauer said China needed to address the root cause of market distortions by speeding up interest rate deregulation. China's efforts to shift its economy to a more consumption-led model have suffered recently. In 2011 consumption emerged as a bigger contributor to growth than investment, but a small stimulus at the end of 2012 reversed that trend. The IMF said a "decisive shift toward a more consumer-based economy has yet to occur." The fund also warned about the level of real Chinese government debt. Taking into account the liabilities of government-owned financing vehicles and off-budget funds, the IMF calculated that "actual government debt" reached 45 per cent of GDP last year. Mr Rodlauer said that while the debt burden was still manageable, the government has less fiscal wiggle room than before. In 2008, when the global financial crisis erupted, China launched a massive stimulus that propelled growth but also sparked a surge in debt. With the economy slowing again, some local officials and companies have called for another stimulus effort. The IMF urged Beijing to continue to resist these demands. "We don't see the need nor do we see the government intention to engage in that kind of stimulus again," Mr Rodlauer said. The IMF has forecast that China will grow at 7.75 per cent this year and 7.7 per cent next year, putting it towards the upper end of estimates. But it said that downside risks to its projections had increased in recent weeks.