China needs to make further progress in rebalancing its economy as it prepares for its next five year development plan, a World Bank (WB) report said Tuesday.

In its latest East and Pacific Economic Update, the WB said China needs tighter macroeconomic policy than it had in 2009 to manage inflation expectations and to contain property market and local government finance risks.

"China's growth prospects over the coming decade continue to look bright, but rebalancing by altering the pattern of growth and investment is becoming increasingly critical to ensure sustainability -- structurally, socially, and globally," the Washington-based lender said in the report it releases every six months.

China also needs to work on reducing rural-urban inequality and inflation pressures while enhancing efficiency gains and further changing the role of the state in the economy, the report said.

China's economic outlook remains "favorable" despite subdued expansion in its main export markets, which warrants the further normalization of its policy stance, the report said.

In its report, the WB reaffirmed its forecast for Chinese economic growth of 9.5 percent in 2010 and a 8.5 percent in 2011.

China remains the largest contributor to economic growth in the east Asia and Pacific region, noted the report.

The report predicted China's inflation rate will remain modest, reaching 3.5 to 4 percent on average in 2010, with core inflation likely remaining subdued.

The report also warned that although the economic recovery in east Asia and the Pacific is robust, large capital inflows present a new policy challenge.

"Attention must now turn to managing emerging risks which may pose challenges to macroeconomic stability," it said.

Driven by global funds' search for yield and expectations for strong growth in the region, capital inflows have risen sharply this year, the report said.

According to the report, the large inflows have helped exchange rates appreciate substantially despite exchange market interventions by central banks. Inflows have also contributed to large increases in asset prices.

"Policy makers are facing complicated circumstances in the last months of this year, and even in next year," said Vikram Nehru, World Bank Chief Economist for the East Asia and Pacific.

Should inflows remain strong, especially against a background of weak global growth, authorities will be faced with the challenge of balancing the need for large capital inflows, especially foreign direct investment, with ensuring competitiveness, financial sector stability and low inflation, he added.

China's foreign exchange regulator warned last week the country is facing "strong pressure" from short-term capital inflows, calling for more measures to contain so-called "hot money" inflows.

The report predicted that real GDP growth in the region will rise to 8.9 percent in 2010, up from 7.3 percent in 2009 and in line with the average growth rate during the 2000 to 2008 period.