The first Chinese man to win a world title, Zhang had abandoned his strongest event under instructions from national coach Yao Zhengjie, the Beijing Daily reported.
"He is still far from his top form and is in an adjustment period now," said Yao, who has limited China's most recognisable swimmer to just one individual event.
"We decided to let him only swim in the 200m freestyle in Shanghai. We believe it's the best choice for him. He's out of his best shape."
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Yao dropped the bombshell at the squad's first open training session before the world championships begin on July 16.
Zhang shot to fame after taking silver in the 400 metres freestyle at the 2008 Beijing Olympics behind South Korean Park Tae-hwan.
He followed that by winning 800 metres gold at the Rome world championships in 2009 but has struggled since, finishing a disappointing third in the 400 at last year's Asian Games in Guangzhou.
"He has no problem mentally or technically, he just needs to tune up physically," insisted Yao, who has included Zhang in his team for the 4x100 metres freestyle relay.
"Zhang should constantly take part in elite events to keep the feeling of competition.
"He has a lot of experience at big events. We hope he will be fully prepared before next year's Olympic preliminaries. We are counting on him to lead the team at the London Games."
Yao is pinning China's hopes on 19-year-old sensation Sun Yang, shock winner of the 1,500 metres gold in Guangzhou last November.
"We will try to win three to four gold medals in Shanghai.
Sun will be expected to win one or two, hopefully in the men's 800 and 1,500 freestyles," Yao added.
However, Sun himself, whose Asian Games record was less than a second slower than the world record set by Australian great Grant Hackett in 2001 wants to drop down to the 400 to take on Park.
"I desire the 400 freestyle more than the 800 and 1,500.
Because my toughest opponent, Park Tae-hwan, will be in that event," Sun said.
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