"In the initial stage after the yuan exchange rate formation mechanism reform, the central bank had to adopt open-market operations to soothe market fluctuation and to play the role of 'fluctuation stabilizer'," the People's Bank of China said in its quarterly report.

But as the market matures, it will "gradually reduce the frequency of its open-market operations and weaken their intensity as a way to gradually step out of the market".

Open-market operations refers to China's central bank buying and selling its own currency to restrict movements in its value.

China scrapped the yuan's long-standing peg to the US dollar last July in favor of an informal link to a basket of currencies, but it has been slow to loosen its grip on the currency's value.

It has drawn fire from trading partners, especially the United States, which argues that the yuan is priced too cheaply and gives Chinese exporters an unfair advantage in trade.

The central bank also reiterated Tuesday it would "deepen reforms" of its foreign currency regime and take more steps to balance international payments as well as stable monetary policy in order to control credit growth.

Concerning its strict controls on its capital account the bank said it would continue to push forward convertibility reforms and expand channels for the outflow of capital by foreign companies in China.

Meanwhile, it warned that the domestic economy faces risks from over investment and excess liquidity in the banking system, as well as from trading and global economic imbalances.

"At the moment although the whole trend of the Chinese economy is very good, while financial operations are stable, there are problems that require a high degree of attention," the bank said

"Overinvestment in fixed assets, Sino-foreign trade problems, excess liquidity and global economic imbalances pose risks to our country's economy.

"The aggravation of imbalances in the global economy has led to the appearance of trade protectionism in some countries," the report said in clear reference to ongoing trade tensions with the United States and Europe.

For its part China has struggled to rein in investment in major infrastructure projects, with fixed asset investment in cities jumping by 29.6 percent in the first four months of 2006 to 1.8 trillion yuan (225 billion dollars).