Anne Krueger, IMF first deputy managing director, said China has a large number of non-performing loans in its banking system and other structural issues that it needs to address.

"Failing that, just opening up (the foreign exchange market) is not a great idea," Krueger said during a question and answer session at a Chicago Federal Reserve Bank/Bank for International Settlements conference on market discipline.

If China straightens out its banking system it could introduce "a little more flexibility in the exchange rate -- but I differentiate sharply between 'flexibility' and floating," Krueger said.

Krueger supported the role of market liberalisation in boosting economic growth but noted, "if you have a weak banking system when you open up, you have a problem."

China has been under pressure from the US government to allow more flexibility in its exchange rate. The yuan is currently pegged at about 8.28 to the US dollar.

US Treasury Secretary John Snow visited Beijing last month to press for more currency flexibility, which some analysts think would lead to a rise in the yuan.

Snow said on Thursday the Bush administration was "not happy" with China's currency system and was actively engaged in changing it.

China, for its part, has "committed to going to market-based flexible rates," Snow told the Senate Banking Committee after release of a Treasury report that concluded that China was not manipulating its currency.

Calls for the US to pressure China have come in part from US industry groups, who contend that millions of factory jobs have been lost to unfair foreign competition.