OECD says China is on track to become world's biggest economy by 2016.

China has to undertake major reforms to ensure continued economic growth with better living standards, according to the Organisation for Economic Co-operation and Development (OECD).

In its latest Economic Survey of China, the OECD found that the world's second biggest economy needs reforms including deregulating interest rates, opening markets dominated by state-owned enterprises to competition and increasing the supply of land for real estate projects.

The agency also wanted the country to ease movement of migrants into cities, taxing carbon and deregulating energy prices. The implementation of the reforms will foster urbanisation that is the key to increased domestic demand.

"The gradual pick-up in activity provides a strong background for the ambitious reforms China needs to put in place to continue on the road to prosperity," OECD secretary-general Angel Gurría said in a statement.

"We are encouraged by the new leadership's policy vision and welcome its emphasis on initiatives to make growth not only strong but also inclusive and sustainable over the years ahead."

The new survey forecasts that China's gross domestic product will grow by 8.5 percent in 2013 and 8.9 percent in 2014.

The OECD noted that China had managed to overcome the global financial crisis better than other OECD member countries and is on track to become the world's biggest economy by 2016, after accounting for price differences.

Recent economic data indicate that the country's growth is picking up pace after a slowdown. China's manufacturing activity expanded at a quicker pace in March with the purchasing managers' index rising to 51.7 from 50.4 in February, according to flash results from HSBC and Markit.

The OECD, however, warned that the country is facing problems such as the slowdown in the global economy, rising property prices, and "excessive off-balance sheet financing" by banks and local governments. Income inequality and an ageing society could also block the country's growth, according to the survey.