WASHINGTON - China's economy may be undergoing a soft landing despite growing global headwinds, and China is well placed to respond to possible deterioration of external environment, the International Monetary Fund said in a report on Tuesday.

"The economy has been slowing partly as a result of policy action to moderate growth to a more sustainable pace, but a worsening of the euro area crisis poses a key risk to the outlook," the institution said in its annual Article IV Consultation Staff Report for China.

The IMF estimated China's economic growth would slow down to about 8 percent this year and then rise slightly to 8.5 percent in 2013.

Without further shocks to agricultural supply, China's inflation is expected to stay in the range of 3-3.5 percent this year and fall to 2.5-3 percent in 2013.

China's macroeconomic policies are geared to slowing growth to a more sustainable pace, and continue to be adjusted in line with evolving conditions, the Fund said.

It considered China's current fiscal stance as "appropriate" and monetary policy "consistent" with its economic objectives.

According to the report, China's current account surplus declined from a peak of 10.1 percent of the gross domestic product in 2007 to 2.8 percent last year, which the Fund said reflected primarily a reduction in the trade surplus and had positive spillovers to the global economy.

IMF executive directors agreed that the key challenges for China's policymakers in the period ahead is to achieve a soft landing for the economy while pushing ahead reforms for a more balanced and sustainable expansion.

Markus Rodlauder, deputy director of the IMF's Asia Pacific Department, told reporters in Washington that China now faces dual challenges - the "longer-term need to continue transforming the economy," and the short-term urgency to manage the slowing down.

Rodlauder said the slowing down in China's growth, which was initially resulted from government policy adjusting, has been compounded by the darkening global economic prospects caused by renewed tension in the euro area.

In the event of a worsening of the external outlook, China has ample room to respond forcefully, using fiscal policy as the main line of defense and with emphasis on measures that support its medium-term reform objectives, said the Fund.

It also underscored the need to accelerate progress in transforming China's economic growth model to be more reliant on consumer demand.

"Such a transformation would substantially boost living standards and make growth more balanced, inclusive, and sustainable," it said.

IMF executive directors welcomed China's progress in financial sector reform, but warned risks from rapid growth of bank credit and encouraged continued upgrading of regulation, supervision, and monitoring of ?systemic risk.