Chinese yuan in-line with fundamentals, challenges ahead, IMF says

China was making progress on re-balancing its economy towards domestic sources of demand and consumption and away from exports and investment, but much still remained to be done, the International Monetary Fund concluded in its latest annual review of the economy.

Indeed, some risks were growing, especially those related to debt at state-owned enterprises, a problem which the Washington-based lender urged officials in Beijing to tackle urgently.

"Directors noted that China’s economic transition will continue to be complex, challenging, and potentially bumpy, against the backdrop of heightened downside risks and eroding buffers," the IMF said in its Article IV consultation.

Significantly, the country's currency, the yuan, was "broadly in-line" with fundamentals after strengthening by about 10% in real effective terms over 2015 and weakening 4.5% since then, the IMF explained.

Thus, despite progress on many fronts, multiple challenges continued to present themselves.

"The economy is advancing on many dimensions of re-balancing, particularly switching from industry to services and from investment to consumption. But other aspects are lagging, such as strengthening SOE and financial governance and containing rapid credit growth," the IMF continued.

Macroeconomic policies were expected to continue supporting activity throughout the remainder of 2016, with consumer price inflation seen picking up from a pace of below 1.5% in the previous year to approximately 2.0% in 2016.

China's current account surplus was seen declining in parallel, from 3.0% of gross domestic product in 2015 to 2.5% as imports rose and tourism abroad continued to widen the services deficit.

Capital outflows on the other hand were projected to moderate in 2016.