China needs to implement reforms with more urgency as the country's economy faces growing vulnerabilities and there are fewer buffers to deal with any shocks, an IMF official said on Tuesday.

"The near-term growth outlook has turned more buoyant due to recent policy support," said David Lipton, first deputy managing director of the IMF.

"The medium-term outlook, however, is more uncertain due to rapidly rising credit, structural excess capacity, and the increasingly large, opaque, and interconnected financial sector," Lipton noted.

China's economy grew at its slowest pace in one-quarter of a century last year, weighed down by weak domestic and foreign demand, cooling investment and overcapacity, particularly in industries such as steel and coal.

Government efforts: debt levels up

Analysts say continued government efforts to stimulate activity and hit growth targets are driving up debt levels, raising concerns about dangers to the country's banking system, which has seen nonperforming loans hit 11-year highs.

"Corporate debt, though still manageable, is high and rising fast," Lipton said, adding that China needs a comprehensive plan and concrete action, especially for State-owned enterprises, to avoid serious problems.

The IMF expects China's economy to grow by around 6 percent in 2017. China has set a goal of at least 6.5 percent growth over the next five years, though some analysts believe real growth levels are already much weaker than official data suggest.

Lipton said China also needs to align local government revenue and expenditure responsibilities, expand social security, implement new budget laws and make the tax system more progressive.

The IMF suggested implementing a carbon or coal tax, which would significantly reduce China's serious air pollution problem and could prevent 4 million to 5 million premature deaths in 2030.

How to do?

In addition to fiscal reform, Lipton said China needs to guard against growing risks in its increasingly complex financial system by increasing regulatory and market coordination and strengthening funding resilience for financial institutions.

Turning to China's foreign exchange policy, which is high on global investors' worry lists after a surprise yuan devaluation last year, Lipton said the exchange rate is becoming "more flexible and market-based."

The IMF encouraged China to set "a goal of achieving an effective float within the next couple of years."

Lipton also noted China has improved its data and communication of policies to markets and the public, and he said further improvement would help China with its economic transition.