Central bank governor Zhou Xiaochuan yesterday raised an alert about rising inflation and formally declared a shift to a tighter monetary policy this year.
The government may also roll out new measures to control the property market, he told a news conference on the sidelines of the National People's Congress.
Zhou's tough talk confirmed an observation made by many economists that the People's Bank of China has sought to curb credit from expanding too fast.
The remarks contrasted with Zhou's usual approach of treading delicately while speaking to the public on policy directions in order to avoid causing market jitters.
Some analysts said Zhou's comments were aimed at damping inflation expectations and highlighting concern about surging property prices fuelled by accommodative monetary policy in the past several quarters.
Last month, inflation rose unexpectedly to 3.2 per cent.
"Inflation merits high vigilance. We plan to stabilise consumer prices and inflation expectations through monetary policy and other tools," Zhou said, although he added that holiday effects may have distorted the number.
A top Chinese banker said Beijing is "fully prepared" for a currency war as he urged the world to abide by a consensus reached by the G20 to avert confrontation, state media reported on Saturday.
Yi Gang, deputy governor of China's central bank, issued the call after G20 finance ministers last month moved to calm fears of a looming war on the currency markets at a meeting in Moscow.
Those fears have largely been fuelled by the recent steep decline in the Japanese yen, which critics have accused Tokyo of manipulating to give its manufacturers a competitive edge in key export markets over Asian rivals.
Yi said a currency war could be avoided if major countries observed the G20 consensus that monetary policy should primarily serve as a tool for domestic economy, the Xinhua report said.
But China "is fully prepared", he added.
The UK central bank expects to sign a three-year currency swap arrangement "shortly", which would allow it to supply yuan in exchange for other currencies if there were a sudden shortage in the London market.
The yuan is not fully convertible, meaning there are rules and regulations making the process of conversion more cumbersome. That can hinder trade as investors are nervous that there will not be enough yuan available if needed urgently for a deal.
David Bloom of HSBC said: "In a currency which is not fully convertible, this offers a pool of liquidity to draw on if needed. That always gives you a comfort as an investor."
With this deal, Britain will become the first major developed economy to install a currency swap line with China, which should help London become a global trading centre for the yuan. The City is already the world's biggest foreign exchange and bond trading centre and Chancellor George Osborne has been driving a campaign for Britain to win more yuan business.
Countries pursuing a monetary policy that hinges on weakening the national currency in the hope of catalysing economic recovery would be wise to remember the associated risks, Russia has warned.
"These measures could have ambiguous consequences. Central Banks following a supersoft monetary policy must painstakingly track the related internal and external risks," Russian Finance Minister Anton Siluanov said during the G20 Finance Ministers' meeting held here.
"Rebalancing global demand requires a broader package of measures than merely correcting the exchange rate," he said while stressing the importance of structural reform across the board - whether countries have a positive or negative balance of payments.
In an environment of high domestic inflation, deteriorating exchange rate of local currency against major foreign currencies and decreasing interest rates, preserving the value of savings and investment is certainly a challenging task. Most people, especially unsophisticated investors, tend to seek refuge in real estate in an attempt to preserve the value of investments. However, small savers and investors who prefer liquidity find it difficult to lock their savings in illiquid investments like property.
In the Indian sub-continent, there has been an historical obsession with gold as an enduring investment: women tend to try and convince their husbands to ‘invest’ in jewellery. All of us, however, know that gold jewellery has never been a good investment. The story is different when it comes to gold metal. Gold has always proven to be a safe haven for most investors, especially for the long run. In a country like Pakistan, which at present is facing all kinds of economic problems, it is becoming increasingly difficult for investors to preserve the real value of their investments. Meanwhile, local savers are also disheartened by the prospect of earning low, or in some cases negative, real return on their savings (and hence incurring a capital loss in real terms). This is also a deterrent for many foreign investors who may wish to invest in the country.
One viable option for many savers is to open up foreign currency accounts in local banks to hedge against exchange rate fluctuations and rising domestic prices. This remains a preferred option for many, especially those who receive foreign remittances on a regular basis. However, while most of the local and foreign banks operating in the country offer foreign currency (US dollar, British pound and euro) accounts, there are nearly zero gold-based savings and investment products.
Given the macroeconomic conditions, it is probably high time for the introduction of gold coins in Pakistan, as an attempt to introduce a stable currency for saving. The current share of Islamic banking in overall banking in Pakistan is about 8%, and we can expect that a very significant proportion of the banked individuals and households would be interested in saving in bullion. Islamic banks in the country can exploit this opportunity to win more business by introducing bullion accounts.