By Kevin Yao

BEIJING (Reuters) - China's growing debt and property risks have touched off an internal debate over whether China should tolerate growth as low as 6 percent in 2017 to allow more room for painful reforms aimed at reducing industrial overcapacity and indebtedness.

The government has said economic growth of at least 6.5 percent is needed each year through to 2020 to meet a previously stated goal of doubling GDP and per capita income by 2020 from 2010 levels. It aims for 6.5-7 percent growth this year.

Many advisers expect the government to stick to this year's target in 2017, or at best change the wording to "around 6.5 percent" to allow for a slightly lower expansion rate next year.

But some advisers say maintaining growth above 6.5 percent is unrealistic because it will force the government to keep up costly economic stimulus measures that have stoked concerns about a sharp rise in credit and the property market. Instead, the target should be reduced to a range of 6.0 percent to 6.5 percent next year, they said.

Real growth is slowing down anyhow and setting a lower target would give China room to push on with reforms needed to meet 2020 targets, these advisers said.

"This year's growth target is definitely high. It's necessary to slightly lower next year's target given that downward pressures still persist," said a government economist, who declined to be identified due to the sensitivity of the matter.

The sources, government economists and advisers, provide recommendations for top leaders to consider. The debate will feed into the annual Central Economic Work Conference expected in December, a gathering of leaders and policymakers that maps out the country's economic and reform agenda for the following year.

China's economic growth targets are important because they determine policy settings. If leaders feel the growth target is at risk, as they have this year, they will adjust policy to ensure economic activity picks up.

The State Council Information Office did not immediately respond to faxed requests for comment.

China's economy expanded 6.7 percent in the third quarter from a year earlier, steady from the first half growth rate. It looks set to hit the official full-year target this year, driven by the stimulus policies and a soaring property market.

TIGHTROPE

Chinese leaders are walking a policy tightrope, trying to bolster growth, create more jobs and prevent debt defaults while also pushing painful structural reforms to foster more sustainable growth.

They have pledged "decisive results" by 2020 on a wide range of reforms to let market forces play a bigger role in driving the economy.

The government has been cutting red-tape and trying to reduce production capacity in surplus industries including steel and coal.

But preoccupied by concerns over immediate economic growth, progress has been relatively slow on some key structural reforms.

These include overhauling bloated state-owned enterprises (SOEs) to reduce their dominance of the economy, reforming land and residency rights to give migrants more confidence to move away from family farms to live in cities and opening up state-dominated service sectors to private investors.

A slump in private investment and capital heading offshore suggest many Chinese entrepreneurs are investing abroad, despite Beijing's repeated pledge to open up sectors dominated by the state.

"We should put more emphasis on structural reforms. We cannot put the most difficult problems in the final year. It will be too late," said an influential economist who advises the government and who declined to be identified.

Beijing has relied on a property rally and state stimulus to drive growth this year, even as it has stepped carefully to avoid repeating the huge stimulus package implemented in the global financial crisis, which saddled the economy with a pile of debt.

China's debt has soared to 250 percent of gross domestic product from 150 percent a decade ago, and the Bank for International Settlements (BIS) warned in September that a banking crisis was looming in the next three years.

"We are going too far down the old road if we still keep the 6.5-7 percent growth target next year," said a policy insider, who declined to be identified.

The International Monetary Fund (IMF) has recommended the government makes a more fundamental change. In a report published in August, it said China should shift away from annual growth targets because they have "fostered an undesirable focus on short-term, low-quality stimulus measures".

That means China is paying a price for its fixation on growth targets, one Chinese policy adviser said.

"It's absurd and distorting," he said. "It's a legacy from the centrally planned economy."

UNCERTAIN OUTLOOK

The 2017 economic outlook is far from certain given weak global demand and property cooling measures that could weigh on the sector.

The IMF expects China's growth to fall to 6.2 percent in 2017, which would be the weakest since 1990, from its forecast for this year of 6.6 percent.

The third-quarter growth has fanned optimism among some Chinese officials and economists that the economy has hit a bottom after slowing for six successive years.

Thus, a researcher with the National Development and Reform Commission, the country's top economic planner, said he expected the government to maintain the 6.5-7 percent goal in 2017.

Zhang Liqun, an economist at cabinet's think-tank, the Development Research Centre, agreed there are risks if the government allows growth to slip too far.

"If economic growth is too low, many firms will have difficulties in sales and cash flows, they will cut jobs and wages, delay loan payments and won't be able to pay debt," Zhang said.

"Policies to stabilize growth will continue next year."

(Reporting by Kevin Yao; Editing by Neil Fullick)