"Strengthening the exchange rate can help reduce inflationary pressures and rebalance the economy," the World Bank said in its latest quarterly update on the world's third-largest economy.

China is facing growing international pressure, particularly from the United States, to let the yuan appreciate. It has been effectively pegged to the dollar since mid-2008.

US senators on Tuesday introduced legislation that would impose tough new penalties on China if it failed to revalue its currency, which they say Beijing keeps artificially low to secure an unfair edge in trade.

The US action follows Chinese Premier Wen Jiabao's insistence at the weekend that Beijing would resist any foreign pressure for a stronger yuan, currently pegged within a narrow range at about 6.8 to the US dollar.

"Inflation expectations can be contained by a tighter monetary policy stance and a stronger exchange rate, while monetary policy also has a key role to play in containing risks of asset price bubbles," the World Bank said.

The bank projected China's gross domestic product would surge 9.5 percent this year, markedly higher than the government's own target for 2010 of around 8.0 percent and the 2009 growth rate of 8.7 percent.

Recovering demand for Chinese exports and robust real estate investment will be the key drivers of the economy this year as massive government-backed spending slows, it said.

While inflation risks remained modest, the bank said containing inflationary expectations, reining in property prices and keeping local government debt "manageable" were key tasks for policymakers.

"We do think it is important to contain this risk of (property) price rises and tightening overall monetary conditions will have to be part of that," World Bank senior economist Louis Kuijs told a Beijing press conference.

China's remarkable recovery from the global crisis -- its economy grew 10.7 percent in the fourth quarter of 2009 -- has been backed by 586 billion dollars in stimulus spending and massive state-sanctioned lending in 2009.

Beijing is now clamping down on lending to calm inflationary pressures, fearing asset bubbles and economic overheating as well as a surge in bad debts.

Policymakers have twice this year increased the amount of money banks must keep in reserve -- effectively limiting how much they can lend -- and increased interest rates on benchmark three-month and one-year treasury bills.

But the World Bank, which provides financial and technical aid to developing nations, said higher interest rates and a stronger yuan would also help reduce inflationary pressures and rebalance the economy.

"The monetary policy stance needs to be tighter than last year and the case for exchange rate flexibility and more monetary independence from the US is strengthening," it said.

World Bank lead economist Ardo Hansson said at the press conference a stronger exchange rate was "part of the arsenal" in tackling inflation.

Wen said on Sunday at a press conference the global slowdown continues to pose risks to China and that Beijing must keep its economic policies stable.

"We will maintain the continuity and stability of our policies," Wen said, adding that as circumstances change, Beijing would make every effort to make such policies "more flexible".

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