China faces risks from a renewed weakening in the global recovery and a worsening credit quality, the International Monetary Fund said Thursday. The country currently face the challenge to sustain its strong growth performance while switching decisively to an economy that is powered by the country's households.

In its 2010 Article IV consultation staff report, the IMF pointed out that China needs to maintain the fiscal stimulus through 2010, while reorienting further toward fiscal measures that will spur consumption. If the recovery continues as envisaged, the government should begin gradually withdrawing fiscal stimulus in 2011 while continuing to expand near-term fiscal support for consumption.

The People's Bank of China should continue withdraw monetary stimulus giving greater role for interest rates, open market operations and reserve requirements to return credit growth to more normal levels. The Washington-based lender noted that current level of subdued inflation reduces the need to raise interest rates. Also, higher interest rate could risk fueling capital inflows.

Further, the IMF suggested China to use the flexibility in the current exchange rate regime to allow for an appreciation of the renminbi in real effective terms. In the medium term, China's current account surplus will probably return to appropriate level as the policy stimulus is wound down and the global economy recovers.