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By Aileen Wang and Lucy Hornby
BEIJING May 10 China's central bank warned of
continued risks of inflation, driven in part by rising labour
costs, while pledging to increase two-way flexibility in its
yuan exchange rate in a quarterly report released on Thursday.
The report's publication came ahead of April's data release
on Friday, which is expected to show overall inflation
moderating to about 3.3 percent but food prices rising by more
than twice that amount, driven by higher vegetable prices.
"The overall price trend is falling, but it has not yet
stabilized, and we need to closely watch the upside risk for
prices in the future," the People's Bank of China said in the
The bank listed some favourable factors that are keeping
prices under control, including "appropriate monetary
conditions" and a relatively stable external liquidity
"As the Lewis turning point approaches, domestic labor
supply is tightening and the price of labor-intensive
agricultural products, the service industry, and resource-based
products will tend to rise further," the bank said, referring to
a stage in a country's economic development when the economy
fully absorbs rural surplus labor that keeps wages from rising.
"As demand climbs, it will drive a resurgence in prices.
Moreover, imported inflationary pressures due to international
commodity price volatility still exist."
By contrast, in the central bank's report for the fourth
quarter of 2011, it pledged to prevent a rebound in inflation.
The central bank said it would step up yuan exchange rate
reform and increase two-way flexibility.
The yuan had essentially only appreciated against
the dollar since it was unpegged from the dollar in July 2005,
but has flattened since late last year. Offshore yuan markets
showed rare expectations of depreciation in the second half of
China widened its trading band in mid-April in what many
analysts saw as an indication that market forces would play a
bigger role in setting the value of the yuan.
April trade data released on Thursday showed that Chinese
exports had risen by a surprisingly low 4.9 percent on year.
"It shows the over-strengthening of the Chinese yuan. That
will show policy makers that they really need to resist any
further strengthening of the yuan," said Darius Kowalcyzk, of
Credit Agricole-CIB in Hong Kong.
The central bank said it would improve risk control for
property loans and strengthen supervision of local government
It will use multiple monetary policy tools to guide
reasonable credit and money growth, the report said, mentioning
reserve requirement ratios and open market operations.
It sounded a cautious note about international conditions,
noting that the European debt crisis constitutes the biggest
uncertainty for the global economy.
Loose monetary policy by developed countries could bring
inflationary pressure and make capital flows more volatile, it
The stand-off over Iran's nuclear program could push up
global crude oil prices, it added. In the first quarter of this
year, oil futures in New York returned to levels not seen
since the previous May, but they have since fallen back to below
$100 a barrel.
(Reporting by Aileen Wang and Lucy Hornby; Editing by Nick
Macfie and Ed Lane)