(Bloomberg) -- China’s real estate market is in an unresolved crisis and Beijing needs to do more to support the sector, the International Monetary Fund said, earning a sharp rebuke from Beijing.

In its annual review of China’s economy on Friday, the IMF said the “real estate crisis remains unresolved,” and despite the broadening policy response, the slump in the sector has “continued and the need for large-scale restructuring remains.”

The IMF forecast the world’s second largest economy will expand 5.2% this year. The Chinese economy is “still operating below potential” in 2023, Sonali Jain-Chandra, the IMF’s mission chief for China, said during a press briefing on Friday. 

Beijing hit back at the IMF’s assessment: “China’s property market has been operating smoothly in general, and is not in a “crisis” situation,” Zhengxin Zhang, who represents China on the IMF’s executive board, said in a statement published with Xuefei Bai, a policy advisor at the Fund. “It is inappropriate to overstate the difficulties in the market.”

The Chinese officials also took issue with the IMF’s growth projection for 2023, calling it “overly pessimistic.” Beijing is expected to announce a growth target at a government meeting next month. 

In its report, the IMF said the government should increase funding for completion of unfinished housing projects and promote market-based restructuring of troubled property developers to address the slump.

The IMF also urged authorities to reform the fiscal framework to address “unsustainable” local government finances dependent on real estate for revenues and as collateral for off-balance sheet borrowing. A property tax should be introduced in the longer term to help the sector transform to a more sustainable model, the IMF said.

The IMF called on China to shift government spending away from investment and toward targeted support for households and to lower interest rates.

Economic Rebound

China’s service sector activities have rebounded quickly this year after the abrupt exit from Covid Zero in December led to a swift peak in infections, although the recovery of the industrial sector has been muted due to the Lunar New Year holiday. That expected recovery in Chinese demand after the reopening was one reason the fund raised the projection for global growth earlier in the week.

READ: IMF Eyes ‘Turning Point’ for World Economy as Growth Bottoms

China’s economic rebound will have a “limited” impact on global inflation, as energy prices have been declining and will stay lower than projected, according to Thomas Helbling, the IMF’s deputy director for the Asia and Pacific department. 

The increase in China’s imports will be stronger among services rather than goods, he added, while the recovery of outbound tourism will have a strong spillover impact on neighboring Asian countries such as Thailand and the Philippines.

Social Reforms

To lift long-term growth, authorities need to accelerate structural reforms such as strengthening the social welfare system, raising retirement ages and leveling the playing field between state-owned and private enterprises, according to the IMF report.

This year, authorities can boost consumption through temporary cuts in social security contributions for workers and direct transfers to households in regions most severely impacted by Covid outbreaks, the IMF said. The e-CNY, the state-backed digital currency currently being trialled in over a dozen regions, could play an important role in this effort, according to IMF.

--With assistance from Tom Hancock.

(Updates with China’s response to IMF report.)

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