China Central Bank Warns of Inflation Risk

China's central bank warned of continued risks of inflation while pledging to increase two-way flexibility in its yuan exchange rate in a report released on Thursday.

The quarterly report came ahead of April's data release on Friday, which is expected to show overall inflation moderating while food prices, particularly vegetables, continued to rise.

"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 report.

It listed some favourable factors that are keeping prices under control, including "appropriate monetary conditions" and a relatively stable external liquidity environment.

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 traded in both directions since late last year.

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.

The central bank said it would improve risk control for property loans and strengthen supervision of local government debt.

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.