The International Monetary Fund Tuesday raised its economic growth forecast for China for this year and next but warned of serious longer-term problems unless it reduces its reliance on credit.
The IMF's forecast for 2017 was 6.6 per cent, compared to a 6.5 percent estimate in January, and 6.2 percent next year compared to 6.0 percent.
"The upward revision...reflects the stronger-than-expected momentum in 2016 and the anticipation of continued policy support," the fund said in its latest World Economic Outlook.
"The medium-term outlook, however, continues to be clouded by increasing resource misallocation and growing vulnerabilities associated with the reliance on near-term policy easing and credit-financed investment."
China faces a "daunting challenge of reducing its reliance on credit growth" and the consequences of failing to do so are serious, it added.
"A dilution of financial regulation may lead to stronger near-term growth but may imperil global financial stability and raise the risk of costly financial crises down the road," the fund said.
The warning came a day after China announced its economy grew an annualised 6.9 percent in the first quarter of 2017, beating expectations.
Analysts say cheap credit has bolstered the construction sector since last year, attracting savers and speculators who have pushed up housing prices in big cities and accelerated manufacturing activity.
Beijing has said it wants to reorient the economy away from relying on exports and debt-fuelled investment towards a consumer-driven growth model, but the transition has proved challenging and led to slower expansion in recent years.
The economy grew 6.7 percent in 2016, its slowest rate since 1990.
"Fundamentally, China has to restrain credit growth. Household debt is now a major slice of the total debt pie and households are much less able to service these debt loads for a number of reasons," said Christopher Balding, professor of economics at Peking University.
"This will increasingly make it more difficult to transition to a consumer economy if households are already that indebted."
China's total debt hit 168.48 trillion yuan ($25 trillion) at the end of 2015, equivalent to almost 250 percent of national GDP, the Chinese Academy of Social Sciences said in its most recent estimate.
Beijing should "focus on containing the problems at their source by accepting slower and more sustainable growth outcomes... and cutting off-budget public sector investment while increasing on-budget allocations for social assistance, health expenditure, unemployment benefits and restructuring funds," the IMF report said.