Rising costs will reduce China's BOP surplus: Zhou

XIANGHE, China (Reuters) - Rising labor and energy costs will help China to reduce its overall balance of payments surplus, Zhou Xiaochuan, governor of the People's Bank of China, said on Thursday.

Higher input costs increase a country's real, or inflation-adjusted, exchange rate, thus dampening demand for exports and making imports cheaper.

But Zhou, speaking to reporters after two days of high-level Sino-American talks near Beijing, said reforms to liberalize Chinese energy prices did not mean that China would refrain from moving on the yuan's nominal exchange rate.

China's energy prices are "not reasonable", Zhou said, while wages paid by companies do not cover social security costs.

"Reform on this front can increase costs and help bring our international payments into greater balance. But that doesn't mean we will solely rely on this and not do the other," he said, referring to exchange rate adjustment.

Indeed, Zhou said he had a discussion with U.S. Treasury Secretary Henry Paulson about gradually increasing the yuan's flexibility. He did not elaborate.

Zhou said China supported a coordinated initiative by a clutch of central banks on Wednesday to pump cash into their banking systems to ease a global credit crunch stemming from the U.S. subprime crisis.

But Zhou said policy makers must not overreact, lest their actions have negative side effects.

(Reporting by Eadie Chen, Writing by Alan Wheatley, Editing by Anne Marie Roantree)