By Joe Cash and Ryan Woo

BEIJING (Reuters) -China's economy is set to grow 5.4% this year, having made a "strong" post-COVID recovery, the International Monetary Fund said on Tuesday, making an upward revision to its earlier forecast of 5% growth, while expecting slower growth next year.

The IMF said continued weakness in the property sector and subdued external demand could restrict gross domestic product growth to 4.6% in 2024, which was still better than the 4.2% forecast contained in its World Economic Outlook (WEO), published in October.

The upward revision followed a decision by China to approve a 1 trillion yuan ($137 billion) sovereign bond issue and allow local governments to frontload part of their 2024 bond quotas, in a move to support the economy.

"We have revised up growth by 0.4 percentage points in both years relative to our October WEO projections, reflecting stronger than expected growth in the third quarter and the new policy support that was recently announced," IMF's First Deputy Managing Director Gita Gopinath said in Beijing.

Over the medium term, growth is projected to gradually slow to about 3.5% by 2028 amid headwinds from weak productivity and population aging, Gopinath told a news conference to mark the release of the fund's "Article IV" review of China's economic policies.

China has introduced numerous measures to support the property market, but more is needed to secure a quicker recovery and lower economic costs to bring it down to a more sustainable size, she said.

"For the real estate sector, such a policy package will require accelerating the exit of non-viable property developers, removing impediments to housing price adjustment, and increasing central government funding for housing completion, among other measures," Gopinath said.

The combination of the downturn in the property sector and local government debt crunch could wipe out much of China's long-term growth potential, economists say.

Local debt has reached 92 trillion yuan ($12.6 trillion), or 76% of China's economic output in 2022, up from 62.2% in 2019. China's Politburo, a top decision-making body of the ruling Communist Party, said in late July it would announce measures to reduce local government debt risks.

"The central government should implement coordinated fiscal framework reforms and balance-sheet restructuring to address local government debt strains, including closing local government fiscal gaps and controlling the flow of debt," said Gopinath.

China should also develop a comprehensive restructuring strategy to reduce the debt level of local government financing vehicles (LGFVs), she added.

LGFVs were set up by local governments to fund infrastructure investment but now represent a major risk to China's slowing economy, with their combined debt ballooning to roughly $9 trillion.

"Improvements to local governments fiscal transparency and risk monitoring are necessary to prevent new vulnerabilities emerging, Gopinath warned, noting "financial stability risks are elevated and still rising."

($1 = 7.2833 Chinese yuan renminbi)

(Reporting by Joe Cash and Ryan Woo; Editing by Edmund Klamann, Christopher Cushing, Shri Navaratnam & Simon Cameron-Moore)