Charles Collyns, deputy director of the IMF's research department, said the mainland needs to rely more on monetary policy to stabilize its economy and sustain the rapid growth rates recorded in recent years.

"Allowing the exchange rate to appreciate more quickly would provide more room for monetary policy to operate in a timely fashion," Collyns told a Beijing news conference.

His comments echoed previous calls from the IMF that China should depend more on monetary policy measures, and less on market interventions, as the country seeks to keep the growth of its economy on an even keel.

"Further increases in interest rates are needed," Collyns said.

Allowing further yuan appreciation would provide more room for raising interest rates, he added. China's economy has grown by 10 percent or more in real terms annually for the past four years.

"Interest rates have been raised considerably so far, and it hasn't really had a tangible effect on cooling investment," Societe Generale chief Asia economist Glenn Maguire told The Standard.

Other economists say interest rates will not be an effective tool for cooling the mainland's equity market as only 20 percent of investment in China is funded from borrowing, while 60 percent is financed from company profits.

"Mass corporates have abundant capital on balance sheets as it is," Maguire said. "I think the yuan will be a more powerful and more effective monetary control tool than interest rates."

According to Collyns, the main near-term challenge for China is to contain the rapid pace of credit and investment growth.

"There is a history in China of cycles where you have credit and investment growth running at very rapid rates, leading to problems in the financial sector," he said.

However, UBS chief Asia economist Jonathan Anderson said the high economic growth is temporary and does not call for a strong policy response.

"The first quarter was a temporary blip, driven by strong one-off inflow of liquidity from the Ministry of Finance, a rush of heavy industrial export-related production as suppliers attempted to `front-run' policy changes, and a resulting January-February `blowout' in the trade balance," Anderson said.

"We expect this to reverse itself very quickly, and expect the second quarter numbers to be back to normal already."

Meanwhile, People's Bank of China vice governor Xiang Junbo said interest rate hikes are playing only a limited role in controlling liquidity in the money market.