The International Monetary Fund said on Wednesday it remains concerned with the potential for a property price bubble in China even though the country's elevated inflation rate may peak within the next month or two.

While efforts by China to cool the real estate sector have reduced transaction volumes and property price increases, prices in some larger cities still look bubbly, Nigel Chalk, IMF mission chief to China, told reporters while discussing the IMF's annual health check of the Chinese economy.

As long as the cost of financing is low and other investment options are sparse, the propensity for property bubbles will remain and the government will have to take progressively tighter administrative measures to stem demand and dampen house price inflation, the IMF review said.

Chalk said China could address the risk of recurring property price bubbles by raising the cost of capital, introducing property taxes and developing alternate household savings vehicles.

While inflation, which has become a pressing social and economic issue in China, was set to ease in coming months, unpredictable shocks from higher food and commodity prices were a risk that could push inflation higher again, the fund said.

Some part of current inflation was likely being suppressed by administrative measures, it cautioned, adding: This may stifle the appropriate supply response to higher prices and could lead to the inflationary dynamic showing more inertia and persistence during this cycle.

He said Chinese officials had raised during discussions the issue of high public debt in the United States, Britain and elsewhere as a risk that could impact Chinese policies going forward.

Beijing has pressed the United States to take responsible measures to boost market confidence in the dollar and U.S. government debt, underscoring investor worries that Washington could default on its debt unless lawmakers raise a $14.3 trillion debt ceiling by an August 2 deadline.

The IMF repeated that the Chinese currency remains substantially below medium-term fundamentals. It said allowing the yuan currency to rise was vital for planned financial reforms and rebalancing demand in China.

A footnote in the report by an IMF internal group put the yuan as undervalued somewhere between 3 percent to 23 percent against a basket of currencies, depending on the type of methodology used to calculate its value.

For the first time ever, the IMF has this year evaluated how policies of five largest economies including China, the United States, Euro zone, Japan and Britain are affecting the global economy.

It said China's exchange rate regime alone may only have modest direct effects in tackling global economic imbalances. But the undervaluation of the currency held back progress in promoting economic rebalancing within China, away from an export-led growth model toward more domestic consumption.

The IMF said the Chinese authorities disagreed with staff exchange rate assessment and emphasized there had been progress in improving the mechanism for setting the exchange rate.

The fund urged China to immediately move ahead with its five-year plan for financial reforms although warned that it was a complicated and risky exercise that needs to be managed carefully and sequenced correctly.

In order to move ahead with financial reform, a prerequisite for that will be to have a more appreciated renminbi which will reduce the pace of reserve accumulation, lessen the amount of liquidity injected into the financial system and allow China to move ahead in a safe way, said Chalk.

(Reporting by Lesley Wroughton; Editing by Ramya Venugopal)

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