China c.bank sees contained inflation, flexible yuan

China and the rest of the world should be able to avert excessive inflation levels given off-setting factors at home and a commitment to stabilise prices around the world, a senior Chinese official said on Friday.

Inflationary pressures had been building amid rising commodity prices and loose monetary conditions, but sound policies by central banks should contain upward price pressures, said Yi Gang, a vice-governor of the People's Bank of China.

"Why it is not severe inflation? I think the monetary policy has improved tremendously and all the major monetary authorities are very committed to fight inflation," Yi told a Bank of France conference on inflation and monetary policy.

Price rises across the globe should prove "moderate" as China looked optimistically to control its own price pressures.

"We have plenty of grain supply and also we have plenty of grain storage in our warehouses," he said, adding that China had plenty of capacity in its manufacturing sector.

"I am confident that we can control inflation in China this year in (an) acceptable level," he told reporters later.

Inflation hit an 11-year high of 7.1 percent in China in January and has become one of the government's biggest policy headaches.

China's annual inflation rate is expected to rise to a median 8.0 percent in February, according to a Reuters poll of 19 economists, after the worst snowstorms in half a century ravaged crops in some central and southern parts of the country.

In his "state of the nation" address to parliament on Wednesday, Premier Wen Jiabao stressed the importance of combating inflation.

Wen said the government would take steps to keep price rises in check, including by increasing food supplies.

MORE YUAN FLEXIBILITY

Addressing China's contribution to global price trends, Yi said that the days of limitless supplies of cheap Chinese labour were nearly over and that domestic wages would rise further.

China's export of low-cost goods over the past 15 years had been a major contributor to low inflationary pressures over the past decade, he said.

"From 2006 to 2010 it is probably the five year period we are entering the turning point," he said, adding that low-cost labour would probably still be found in some countries.

Turning to the China's role in fuelling global imbalances by, critics say, keeping the yuan undervalued, Yi listed actions Beijing had taken to improve its currency regime.

The yuan had appreciated by more than 16 percent against the U.S. dollar over the past two years, he said, reiterating China's goal to move to a fully floating regime in time.

"Also I should emphasise that in the past two years we have worked very hard in terms of building up the market of foreign exchange," he said.

Market forces would become an increasing determinant for the yuan's levels and China would make the currency more flexible albeit in a steady and stable manner that would foster economic stability, he said.

Critics say China has not allowed the yuan to rise quickly enough since depegging it from the dollar in July 2005 and allowing it to float in managed bands.

This has helped fuelled both a massive trade surplus through cheap exports as well as a dramatic accumulation of foreign exchange reserves, provoking calls for quicker currency appreciation by trading partners.