The Chinese economy risks a hard landing, according to an International Monetary Fund report on China's economy published today.

Chinese officials have been attempting to slow down China's explosive economic growth, but the fragile state of the banking system and China's fixed exchange rate remain obstacles to ending China's past pattern of a boom-and-bust, the IMF said.

The research behind this month's IMF report was completed in July. Since then China has enacted some of the measures advised by the body. Last week, China raised interest rates for the first time in nine years in a move designed to moderate economic growth.

The IMF called for further far reaching measures and reiterated that "greater exchange rate flexibility remains in China's best interest".

The IMF board said that economic conditions favoured such a move "without undue delay."

Chinese government officials have told the IMF they are worried about the potential impact of an appreciation of the coutry's curreny, the yuan, on the domestic economy. A rise in the value of the yuan would make Chinese exports more expensive.

They were also concerned that a small initial move could only lead to greater capital inflows.

The Chinese authorities said yesterday that it would crack down on speculative foreign exchange trading to maintain its economic stability.

Chana's foreign exchange regulator said it would act to deter speculators from betting on a revaluation of the yuan, following last week's rise in interest rates.

China has a closed currency market, with the yuan pegged to the US dollar, but the State Administration of Foreign Exchange said there had been illegal foreign exchange settlements by some banks and companies.

The IMF praised China's $45 billion restructuring of two large state banks, but cautioned "problems in the rest of the banking system should also be addressed expeditiously."

"The financial condition of the banking sector remains weak," the IMF staff said.

The IMF suggested the recently created Central Huijin Investment Company - the government's holding company in the reform of the two large banks, could play an expanded role in reforming the banking system.

The IMF staff projects China's real GDP growth will average around 9 per cent in 2004, with growth slowing to a 7.5 per cent annual rate into 2005 from the effects of the monetary tightening.

CPI inflation is expected to be 3.5 percent in 2004, with inflationary pressures easing towards the end of the year as food price gains slow down.

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