International Monetary Fund (IMF) head Christine Lagarde has said that China must stop its economy being too dependent on exports and investment.
She also said the yuan could become a global reserve currency if China implemented market-oriented changes.
Ms Lagarde is on a visit to China and India that began over the weekend.
Speaking to politicians and business leaders in Beijing she said there were signs the global economy was stabilising.
Ms Lagarde stressed that at the highest levels, China leadership appears to be willing to make the changes needed to ensure that the world's second-largest economy remains a main driver of global growth.
However, she said that as well as financial reforms, authorities needed to boost household incomes and make sure that the benefits of growth were reaching more people.
She backed, in principle, China's hope of turning its currency into a global reserve currency.
However, she said that would only happen if certain conditions were met.
"What is needed is a roadmap with a stronger and more flexible exchange rate, more effective liquidity and monetary management, with higher quality supervision and regulation, with a more well-developed financial market, with flexible deposit and lending rates, and finally with the opening up of the capital account," Ms Lagarde said.
"If all that happens, there is no reason why the renminbi will not reach the status of a reserve currency occupying a position on par with China's economic status."
The IMF and others have said in the past that China keeps its currency undervalued, giving its exporters an unfair advantage.
As part of her short visit, Ms Lagarde met Vice Premier Li Keqiang - who is expected to become the China's premier when Wen Jiabao steps down in a leadership change - Vice Premier Wang Qishan and Zhou Xiaochuan, governor of the central bank.
She said the world economy has "stepped back from the brink, and we have cause to be more optimistic".
Last week, the IMF approved a 28bn euro ($36.8bn; £23.2bn) loan for Greece as part of second bailout by the European Union. Ms Lagarde said the US economy was also showing signs of recovery.
"We have made important steps forward," said Ms Lagarde.
However, she added a word of caution.
"The global economy may be on the path to recovery, but with not a great deal of room for manoeuvre, and certainly no room for policy mistakes."