The International Monetary Fund lowered China's growth estimate and warned the nation to respond to the challenges especially in the area of social financing and reduce high dependence on investment.

The economy will grow 7.75 percent this year and next, the IMF said Wednesday. The lender lowered its projections for 2013 from 8 percent and the outlook for next year from 8.2 percent.

The rapid growth in total social financing raises concerns about the quality of investment, while growth has become too dependent on the ongoing expansion in investment. Moreover, high income inequality and environmental problems signal the need to change in the growth model.

The lender advised the nation to implement fiscal stimulus, focusing on measures that support household incomes and consumption, if growth were to slow sharply below this year's target.

The IMF noted that China still has significant policy space and financial capacity to maintain stability even in the face of adverse shocks, but the margins of safety are narrowing.

The interest rate liberalization as well as greater exchange rate flexibility will support re-balancing, First Deputy Managing Director of IMF David Lipton said at a briefing after concluding an annual review of China.

He repeated the view that the yuan is "moderately undervalued" relative to a basket of currencies. Further, he called for progress on interest rate liberalization and exchange rate flexibility.

In addition, the IMF said China should permit more competition in sectors that are considered strategic, in order to boost growth and household income.

The IMF concluded that measures to withstand challenges under the new Chinese Premier Li Keqiang will require strong determination and administrative capacity. There is need for a decisive new round of reforms to shift the economy onto a more balanced and sustainable growth path.

RTTNews