The International Monetary Fund (IMF) said China needs to implement economic reforms and rebalance its economy including allowing its tightly controlled currency to rise to promote economic stability.
''Financial reform will be of great help in rebalancing China's economy,'' said Nigel Chalk, the IMF's mission chief for China.
According to the IMF, China has increased its impact on the global economy and holds "an important stake for the world in its stability."
In its first 'Spillover Report' on China's economy, which is designed to examine how domestic policies in major economies affect the rest of the world, the IMF said inflation, property bubbles, a decline in credit quality from an excessive amount of bank loans and the currency were risks to sustainable growth.
It said the yuan was 'substantially' undervalued by between 3 -23 per cent, depending on which method is used to measure the gap.
"We do believe that China's currency needs to be stronger," Chalk said.