2nd UPDATE: China To Keep Prudent Monetary Policy, Fine-Tune As Appropriate

-- China's PBOC says it will maintain the current monetary policy stance, but fine-tune policy as and when appropriate
-- Warns that inflation risks remain and price stability isn't "automatic"
-- Forecasts M2 to grow around 14% in 2012, compared with 13.6% growth at end-December
-- Vows to increase two-way flexibility of the yuan exchange rate


BEIJING (Dow Jones)--China's central bank on Wednesday pledged to maintain its current "prudent" monetary policy stance, but also said it would fine-tune policy as and when appropriate.

China still faces the risk of weak economic growth, as well as inflation pressures, the People's Bank of China said in its fourth-quarter monetary policy report.

The PBOC said it would properly balance "maintaining relatively fast economic growth, adjusting the economy's structure and managing inflation expectations."

Some analysts have in the past interpreted the order that these often-stated goals are listed in to be an indication of the authorities' priorities, which would suggest that inflation is a less pressing concern.

However, the PBOC warned that although inflation pressures have moderated, the central bank can't let its guard down against inflation risks.

"Price stability won't be achieved without conditions or automatically. It requires that macroeconomic policy continues to maintain a good intensity and pace," the PBOC said.

Noting that January's consumer price index rise of 4.5% from a year earlier exceeded market expectations, the PBOC said "inflation expectations are still unstable currently," especially due to tightness in markets for labor and other production inputs, and ample global liquidity.

The report projected that M2, the broadest measure of China's money supply, will likely rise around 14% this year, which would imply a slight acceleration from last year. At the end of December, M2 was up 13.6% from a year earlier.

The PBOC said it would flexibly use interest rates and other price-based tools to maintain the overall stability of the economy and price levels.

The PBOC will also flexibly use interest rates to adjust the demand for capital and saving and investment decisions, the central bank said.

Housing prices in some areas have already started to moderate, and overly fast property-price rises have been "initially contained," it said.

The PBOC also said it will use a differentiated reserve requirement ratio, whereby it requires different banks to hold different levels of reserves, as a tool for counter-cyclical monetary policy.

The PBOC said it would keep the yuan exchange rate "basically stable at a reasonable level," repeating standard language, and also that it would "increase two-way flexibility" in the exchange rate.

The PBOC also said it would push forward more tools to manage exchange-rate risk, expand the type and scope of cross-border yuan business, and explore allowing cross-border yuan movement by individuals.