The World Bank has reiterated its view that the Chinese government should allow the yuan to strengthen against other international currencies.
The bank said a stronger yuan would help to reduce inflation and encourage domestic consumption in China.
It also suggested that China should raise interest rates to help stop its economy overheating.
China has been widely criticised, particularly in the US, for keeping the yuan artificially weak.
This, critics argue, makes Chinese exports cheap and therefore gives Chinese exporters an unfair advantage.
The bank also argued that a more flexible currency would help China's domestic economy.
"More exchange-rate flexibility would make monetary policy more independent," the bank said.
The would allow China "to raise interest rates even when interest rates in high-income countries remain low," it added.
The Chinese government has been concerned about its economy overheating, with food and property prices in particular increasing rapidly.
So far, the government has not raised interest rates to cool economic growth, which hit an annual rate of 11.9% in the first quarter.
Instead, it has introduced measures such as limits on bank lending.
The World Bank estimates that China's economy will grow by 9.5% this year and by 8.5% in 2011.
"Overall growth prospects remain solid and much less uncertain than a year ago," it concluded.