WTO: China must address rich-poor gap

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The global commerce body also urges China to increase spending on health, education and pensions so that people rely less on savings and consume more in the report. This would "reduce China's reliance on exports for growth, and hence its vulnerability to economic slowdowns abroad," it says.

"China needs to continue to address a number of important social and economic challenges, including various economic imbalances, which could jeopardize the economy's stability and thus the achievement of a 'harmonious society,'" says the 193-page report, which will be made public later this month.

The WTO praised Beijing's "structural reform strategy" for helping the country become the third-largest economy and trading power in the world, with GDP rising by more than 30 percent from 2004 to 2006 and the number of people living on less than $1 a day declining to less than a 10th of the population.

But it warned that inflation has been rising, reaching an 11-year high of 7.1 percent earlier this year, largely because of higher food prices.

The economic slowdown occurring in the United States could cool China's booming growth rate and, with it, reduce inflationary pressure, the WTO said.

In the short-term, though, "a more flexible exchange rate regime could enable China to operate a more independent monetary policy, which would be better suited to ensuring a low and stable rate of inflation," the Geneva-based body said.

The United States and Europe have long clamored for China to allow the yuan to rise in value against the U.S. dollar and the euro. Beijing has let it rise gradually, but manufacturers abroad say the action has not been fast enough and charge China with keeping its currency artificially low to undersell overseas competitors.

The WTO did note signs that China's exchange rate has become more flexible recently, citing the yuan's 1.6 percent appreciation in relation to the dollar in January.

It said other "imbalances" in the Chinese economy include the country's dependency on exports and investment for growth; an underdeveloped capital market; assistance and incentives in the manufacturing sector that are hampering efficiency; environmental problems; and the divide between urban and rural residents.