China needs to retool its economic engine to be less export-driven and more dependent on domestic demand, and to do so it needs to let its currency strengthen, the U.S Treasury's top financial diplomat suggested on Monday.

 China's fiscal and monetary policy in recent quarters has trimmed its trade surplus and boosted the contribution of domestic spending to economic growth. The challenge, said Treasury's under secretary for international affairs Lael Brainard, is to continue on that path.

 "We must guard against the risk that China's current account surplus resumes its pre-crisis trajectory as global demand recovers and China moderates its stimulus," Brainard said in remarks prepared for delivery at an Asian banking conference hosted by the San Francisco Federal Reserve Bank.

 "Greater exchange rate flexibility is naturally an important element of this package of policies that can help sustain momentum to grow domestic demand."

 Brainard's remarks come after a period of relative quiet by U.S. officials on the issue of China's currency policy.

 The financial crisis illustrated the dangers of relying on exports for growth, she said, and expecting the U.S. consumer to resume the role of global economic engine is "risky and unsatisfying," said Brainard, who won Senate confirmation for her post in April.  Instead, China must rebalance its economy, she said.China two weeks ago told the U.S. it will boost its social safety net, and the country must also provide households with financial services products that allow them to finance education and take out insurance, she said.