China is trying to make the yuan more flexible to reflect market supply and demand, but any sharp rise in the currency will be dangerous to the fast-growing economy, an influential Chinese economist said on Friday.
Yu Yongding, head of the Institute of the World Economics and Politics at the Chinese Academy of Social Sciences, said last month's mild yuan revaluation could hit some exports, but would help reduce the economy's over-reliance on external demand.
"In future, we will allow market forces to play a bigger role in setting the exchange rate, but we can never rule out market interventions," Yu told Reuters in an interview.
Yu is the only academic member of the central bank's monetary policy committee, which advises on, but does not set, policy.
"I don't advocate a big, one-off revaluation as I believe such a move will be very dangerous," Yu said.
Speculation swirled in financial markets on Friday that a further revaluation was imminent but the central bank denied that such a move would come soon.
China revalued the yuan by 2.1 percent against the dollar on July 21, scrapped a decade-long peg against the dollar and put the yuan under a managed float with reference to a basket of foreign currencies, including the dollar, euro and yen.
Yu, who described the basket system as transitional, said the new regime made it harder for speculators to bet on the yuan.
"The basket system is transitional and I hope government intervention will be reduced gradually," he said. "Other things being equal, the basket system will help restrain speculation as they can no longer put a one-way bet."
Under the managed float, the yuan can rise or fall against the dollar by as much as 0.3 percent a day.
So far the yuan, whose value remains closely guarded by the People's Bank of China, has not come close to using even that modest leeway - due mainly, analysts say, to central bank intervention.
Yu said China's foreign exchange reserves were expected to continue to rise sharply this year, partly fuelled by a hefty current account surplus that was likely to hit at least $80 billion this year, despite the yuan revaluation.