People's Bank of China Governor Zhou Xiaochuan has cautiously welcomed a quicker revaluation of China's yuan in the near term as he acknowledged that the country's banking sector has been preparing for further exchange rate reforms.

At a high-profile meeting of top finance officials from the world's 20 biggest economies, held in Melbourne, Australia on November 18, Zhou told attending central bankers and finance ministers that China's financial sector was much stronger than it was three or four years ago and could cope with interest rate reform and a more flexible yuan.

Since China removed yuan's peg from the greenback in July 2005, the Chinese currency has strengthened 3 percent, with half of the gains being achieved in the latter half of this year. However, the rising trade surplus continued imposing pressure for a stronger yuan.

Though Zhou's remarks may not indicate drastic changes in China's longstanding "gradual" stance on the renminbi exchange rate reform, some technical adjustments, such as extending the daily trading range of the renminbi, are likely to be in the pipeline.

Zhou's message was well received. Bloomberg News quoted him as saying that China's central bank hadn't been pressured about the yuan at the two-day Melbourne meeting.

Compared with his prudence on the exchange rate issue, Zhou is more optimistic when it comes to the fight against inflation.

According to him, China is registering a relatively high speed of growth and its labor cost is on the rise, increasing the risk of a higher inflation rate. Moreover, since the country is determined to resort to the pricing leverage to promote energy conservation, the move is expected to drive up energy prices and "add to inflationary pressures."

However, Zhou stressed that a well-built pricing mechanism is much more significant in the long term. He added that the increasing government investment in the agricultural sector would help stabilize grain prices, thus creating favorable conditions for effective control of inflation.