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But the country's trade imbalance remains a concern as exports continue to outstrip imports, the bank said in its quarterly report on China's economy.

The World Bank said the economy should grow by 9.6 percent in 2007, down from last year's 10.7 percent growth, its highest rate since 1995.

Exports are likely to expand by 19.8 percent in 2007, while imports are projected to grow 17.5 percent, it said.

Generating Demand

China is under pressure to shift the engine of its economic growth to domestic consumer demand from an over-reliance on exports and investment, which makes the country vulnerable to sudden drop in demand for Chinese goods or a global slowdown.

"China's internal macro challenges remain manageable, but the external imbalance is on the rise. Thus, policy measures that address domestic concerns could ideally also reduce the external imbalance," said the Washington-based international lender.

But the bank said investment would remain strong "while boosting consumption will remain challenging, particularly in rural areas."

"China's industry, investment and export-based growth model has become problematic because of trade tensions and environmental and resource constraints," it said.

Those tensions include a trade surplus -- which hit a record $177.5 billion last year, up 74 percent from the previous year -- that has strained ties with Washington and other trade partners who say Beijing has not done enough to let its currency appreciate.

Yuan Appreciation

China has allowed the yuan to rise gradually against the dollar since cutting a direct link to the dollar 18 months ago and raising the yuan's value 2.1 percent. Since then, the yuan has appreciated about 4.3 percent against the dollar.

The flood of export revenues is adding difficulties for Beijing to keep inflation in check, however, the bank said that in the medium term "a significant surge in inflation seems unlikely."

The government raised interest rates twice last year and imposed curbs on real estate, auto manufacturing and other industries to slow a surge in investment, but the report said a risk of rapid investment growth remained.