China c.bank chief warns of inflation risk

BEIJING Wed Jan 5, 2011 6:52am EST

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BEIJING (Reuters) - China's central bank governor Zhou Xiaochuan warned that inflation was mounting and that more could be done to guide the growth of money, an indication that price pressures still top the list of official concerns.

In an interview with a magazine run by the People's Bank of China, Zhou spoke confidently of the country's economic growth prospects, but sounded a more cautious note on inflation, which is running at its fastest in over two years.

"China's economy is continuing steady and relatively fast growth. The recovery trend has been further strengthened and growth momentum is relatively strong," Zhou said.

"But our country is also facing rising inflationary pressure and expectations," he said.

Zhou's warning on price pressures is the latest from officials in China, where 28-month high inflation and record house prices have sown public discontent, a concern for the government.

In keeping with recent vows to use a slew of monetary policy tools, Zhou said Chinese lenders could be ordered to lock up different-sized portions of their deposits at the central bank, an administrative measure that limits lending.

Of late, Chinese central bank officials have repeatedly floated the idea of using such differentiated reserve requirements.

Shanghai Securities News, an official paper, said on Wednesday that requirements will be based on a bank's role in the economy, citing unnamed sources.

Zhou said such a measure would help ensure reasonable money growth in the world's second-largest economy and should fall under the aegis of an overall policy that is designed to be "counter-cyclical."

Without elaborating, he said the central bank was also considering raising capital requirements for "systematically important" Chinese banks to cut risks in the banking sector.

"We may dynamically adjust selective reserve ratios and further enrich our monetary policies to guide a reasonable growth in money and credit," Zhou said.

Many economists have blamed excess cash in China's monetary system -- in part the result of the nation's 2009 record bank lending spree -- as a key driver of inflation.

But Zhou took aim instead at the United States, China's biggest single trading partner.

"The quantitative easing policies adopted by the U.S. and other major economies have a noticeable spill-over effect on international liquidity, which further intensifies imported inflationary pressure," he said.

China's top leaders have said repeatedly in recent weeks that taming price pressures is a priority this year.

In a nod to that, China Securities Journal, an official newspaper, said the government should let the yuan rise 5 percent this year to rein in imported inflation.

(Reporting by Aileen Wang and Koh Gui Qing; Editing by Simon Rabinovitch and Toby Chopra)

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