China needed to rein in runaway investment, raise borrowing costs and relax its currency to retain control over its booming economy, the International Monetary Fund (IMF) said.

In its latest World Economic Outlook report, the IMF also said China was set to entrench its dominance of the global textiles industry following the scrapping of quotas at the start of this year.

China has been struggling to slow its economy, seeking to keep a lid on investment in key sectors such as steel, autos and construction by curbing bank lending.

Despite these measures, Asia's second-largest economy would continue to be the regional growth leader, the IMF said, predicting gross domestic product (GDP) growth of 8.5 percent this year and 8 percent next year.

Last year China��s GDP grew an estimated 9.5 percent, the IMF said.

However, China needs to better target investment, which accounted for an "extraordinary" 45 percent of GDP last year.

"We have been concerned about the quality of investment, and financial sector as well as public enterprise reform will be critical to improving it," IMF senior economist Raghuram Rajan said.

Inflation in China remains low despite stellar growth levels. But the IMF said pressure on costs �� including wages and utility shortages, especially for electricity �� was now growing.

"Given the considerable economic momentum, further tightening of monetary conditions is likely to be required to prevent a resurgence of investment," the semiannual report said.

Aside from the yuan, international trade tensions have intensified with China grabbing an ever-growing share of the world textiles pie since quotas were eliminated.

China's textile exports soared 29 percent in the first three months of the year, and the country was already the world's largest exporter of clothing with 28 percent of the market, the IMF said.

That has caused anger among textile workers in the United States and the European Union, whose governments have taken measures that could result in limits on Chinese textile imports being reimposed.

The IMF warned the developed world against taking action that would "distort" world markets, noting that textiles producers in South Asia were likely to step in to fill the gap left by any lessening of Chinese shipments.

Turning to China's budget, the IMF called on the government to maintain a ��tight fiscal stance�� to contain demand pressures.

The report also said that deeper progress on bank and public enterprise reforms was ��critical,�� and called for greater labor market flexibility such as easing internal migration rules to manage a rising labor force.

Source: Shenzhen Daily/Agencies