The Chinese economy is expected to expand 11.5 percent this year, the IMF said in its latest global report, revising upwards a July forecast of 11.2 percent.

In 2008, China's economy will grow 10 percent, the IMF said in its World Economic Outlook, cautioning that this projection -- like others before it -- could be too timid to match the torrid pace of China's growth.

"The projected easing of growth in China may not materialise unless the authorities tighten monetary policy more decisively and allow a faster appreciation of the exchange rate," it said.

"Faster growth in the near term, however, would come at the cost of increased downside risks related to overinvestment beyond the projection period."

The IMF said that greater exchange rate flexibility in some countries, including China, which now has foreign exchange reserves of 1.43 trillion dollars, "would also be helpful."

China has seen the inflow of foreign exchange explode due to an enormous trade surplus that is set to break all records this year -- and by the government's own admission could hit 250 billion dollars.

China de-linked the yuan from the US dollar in 2005 and has since allowed it to rise nearly 10 percent against the greenback, but critics of the nation's trade surplus argue it is not enough.

The surplus is also proving a headache for China itself, as its policy of keeping the exchange rate on a tight leash means all incoming foreign exchange is converted into local currency and pumped into the domestic financial system.

To counter this, the government is forced to issue bonds and other monetary instruments to soak up the extra liquidity -- an exercise known as "sterilisation" -- but that has been only partially successful, the IMF said.

"In China, the large increase in reserves has been only partially sterilised and has added to already substantial liquidity in the banking system, threatening to underpin a further surge in lending and investment growth," it said.

Conversely, loosening the controls on the exchange rate would make it easier for the Chinese government to carry out economic policies at home, the IMF said.

"A more flexible exchange rate would give monetary policy more scope to focus on domestic objectives, particularly the need to slow lending and investment growth," it said.

The IMF also urged Beijing to address the very large "precautionary savings" of the Chinese public, referring to money put in the bank to prepare for a rainy day.

If the government spent more on health care, pensions and the social safety net, the Chinese could start allocating more of their income to consumption, in turn boosting imports, the IMF said.

"Together with reduced incentives for investment in the export sector, this would contribute to a narrowing of the very large current account surplus," it said.

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