Of course, it is not really possible to say what is “needed.” China will probably not cease to exist if it fails to have democratic reform. Therefore, it is hard to really say what is “necessary” and what would simply be a good idea.
On the whole, it would be very good for China if it had democratic reforms of some sort. This would be true both in terms of its society and in terms of its economy. Socially speaking, democratic reforms would make people in China much more content with their lives. Currently, many people are very frustrated with what they see as the lack of government responsiveness and transparency. They feel that the government does not really respond to their needs and they feel that the government can essentially do whatever it wants to them. This has many of them very unhappy. A happier populace might make for a more stable country.
Economically, reforms would probably be good as well. The Chinese economy is weighed down to some extent by the control that the government has over it. Local governments often control local businesses and do not allow them to do the things that would be most economically beneficial. Less corruption in government would also help the economy greatly.
Thus, while China probably does not absolutely need democratic reform, such reforms would be beneficial to the country (if not to the Communist Party).