China is transitioning to a slower yet safer and more sustainable growth, with the growth rate forecasted to slow to 6.8 percent this year on the back of slower investment, especially in real estate, said the International Monetary Fund (IMF) on Friday.

"The labor market has remained resilient despite slower growth, as the economy pivots toward the more labor-intensive service sector. This, in turn, has supported household consumption," the Washington-based institution said in its annual Article IV Consultation Staff Report for China.

The IMF said that the substantial appreciation of the Chinese currency, renminbi, in real effective terms this year, has brought the exchange rate to a level that is "no longer undervalued."

The IMF considers China's recent move to improve its exchange rate formation system as "a welcome step" to allow market forces to have a greater role in determining the exchange rate. It reiterated that China can, and should, aim for an effectively floating exchange rate regime within two or three years.

The IMF welcomed China's progress in reducing vulnerabilities, including by slowing down credit growth, moderating investment, and passing a new budget law aimed at safeguarding fiscal sustainability.

"The challenge now is to take the next steps to a more open and market-based economy," said Markus Rodlauer, IMF mission chief for China. The IMF urged China to make "bold" structural reforms, such as moving to a more market-based financial system, improving the management of government finances, and leveling the playing field between state-owned enterprises and the private sector.

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