"The use of administrative controls and window guidance for lending in conjunction with some monetary policy measures has not been effective in providing a lasting solution to the problem," Rato told a press briefing.

"Rapid growth of credit and high levels of investment are a risk for the Chinese economy and could materialize to inflation but also ineffective investment," he said.

Rato made his remarks after meeting with Premier Wen Jiabao and central bank chief Zhou Xiaochuan as part of bilateral discussions concerning the reform of the IMF and the state of the Chinese economy.

China's economy soared 10.7 percent last year, the highest level in 11 years and topping 2005's 10.4 percent growth level, the government announced this week.

To better control its economy the IMF said China must rely more extensively on monetary policy but the tight management of its currency is constraining it from doing so.

"If monetary policy has to take a heavy tool in sterilizing large inflows into the economy, the capacity to use monetary policy to do other things diminishes."

Rato also questioned the speed of China's promise to move toward giving the yuan fuller play by placing it in a basket of currencies.

"We all know the formal decision in July 2005 was to move toward a basket and we believe that decision was correct and is even more correct now, that's why the implementation is a key question," he said.

China ended a decade-long peg to the dollar in favour of a managed float at that time, revaluing the currency with reference to a basket of currencies.

It has repeatedly promised to allow its foreign exchange regime to become more flexible and actually place its currency in a basket.

Rato said the success of China's currency policy should not be judged solely against the dollar but against the currencies of all its trading partners.

The yuan, which has strengthen almost six percent since it was revalued, ended Friday trade at 7.7755 against dollar, down from Thursday's finish at 7.7690.