WASHINGTON - The International Monetary Fund (IMF) should work on the management of cross-border capital flows and global liquidity, the deputy governor of China's central bank said, highlighting inflation as a global "policy issue".

"Great volatility of cross-border massive capital flow brings heightened risks in terms of inflation and asset bubbles," Yi Gang of the People's Bank of China said on Saturday at an IMF meeting in Washington. "Loose monetary conditions build up inflationary pressures" in both advanced and emerging market economies, Yi said.

Advanced countries should "address global imbalances" from their "root cause" by working on their fiscal sustainability and reducing the cost of government and bank financing, Yi said. The European sovereign debt crisis remains "severe" and countries need to seek political consensus to reduce sovereign debt risks, he said.

Related readings: IMF sees strong growth but signs of overheating in Asia  IMF warns of economic risks from credit and asset bubbles

China, where inflation quickened to the fastest pace in almost three years last month, has blamed the United States monetary stimulus for fueling increases in its consumer prices. Some US economists say the inflation results from the yuan's inflexible exchange rate.

Currency depreciation in China and other Asia countries has been "translated into" inflation, Lawrence Summers, President Barack Obama's former top economic adviser, said earlier last week at a conference in Washington. "So their ability to manage the real exchange rate is actually lower than many people would have imagined," he said.

The yuan's gradual appreciation versus both the dollar and a currency basket will help China tame inflation, Yi said in an interview on Friday. The government is still able to meet a 4 percent target for inflation this year, he said.

China's economy grew a more-than-forecast 9.7 percent in the first quarter, while consumer prices rose 5.4 percent, the fastest pace since July 2008. The yuan has strengthened 0.9 percent this year to 6.5325 a dollar as of Friday, after appreciating 3.5 percent in 2010.

Yi also said in his statement that the IMF should explore more diversified reserve currencies and wider use of the Special Drawing Rights, the basket of currencies that IMF members use to settle accounts with each other.

Bloomberg News