China economy improving, policy flexible: central bank

BEIJING Thu Nov 8, 2012 5:08am EST

An employee works at the Beiqi E150EV car assembly line of Beijing Electric Vehicle Company, in Beijing November 7, 2012. REUTERS/Jason Lee

An employee works at the Beiqi E150EV car assembly line of Beijing Electric Vehicle Company, in Beijing November 7, 2012.

Credit: Reuters/Jason Lee

BEIJING (Reuters) - China's economy is showing signs of improvement and monetary policy settings will ensure continuity and flexibility into 2013, central bank governor Zhou Xiaochuan said on Thursday.

Zhou was speaking to reporters on the sidelines of China's Communist Party congress which is meeting to choose new leaders against a backdrop of recovery from the country's weakest period of growth since the 2008-09 global financial crisis.

"October data is showing signs of improving. The trend of the domestic economy is evolving in a good direction. We will keep continuity and flexibility in next year's policy," Zhou, governor of the People's Bank of China (PBOC), said.

China's recovery likely strengthened in October and data due on Friday could cement investor expectations of a burgeoning rebound.

Fixed asset investment and industrial production growth are the key numbers to watch in Friday's flurry of releases - which also include consumer and producer price inflation as well as retail sales - as they are barometers of both domestic activity and output from China's export-oriented factory sector.

The consensus view among economists is that a seven-quarter long cyclical downturn in China's growth ended in Q3, when it dipped to 7.4 percent year-on-year. A tepid rebound to 7.7 percent is anticipated in Q4 and full-year growth remains on course for its slowest year since 1999.

Doubts linger meanwhile about the reliability of external demand - exports were worth about 31 percent of Chinese GDP in 2011, according to the World Bank, with the external sector supporting an estimated 200 million jobs - despite a pair of manufacturing sector surveys on November 1 that signaled the economy began to perk up last month.

EXTERNAL RISKS

Zhou said that external risks still loomed large, but that the central bank was ready to respond if necessary.

"There is still room for adjusting the domestic policy based on our research an observation. There are big uncertainties in the impact from the outside. We cannot be entirely sure about where (the global economy) is heading," he said.

The central bank has been fine tuning policy for around a year to help underpin growth in the world's second-biggest economy.

The People's Bank of China cut benchmark interest rates in June and July with accompanying steps to give banks more freedom in setting borrowing costs and has lowered reserve ratios for commercial lenders three times since late 2011, freeing an estimated 1.2 trillion yuan ($193 billion) for new lending.

Tame inflation - consumer prices in October are forecast to have risen 1.9 percent from a year ago versus a government target of 4 percent - implies scope to further cut rates, though most recently the PBOC has relied on large-scale injections via open market operations to ensure financial system liquidity.

Zhou's comments follow those of China's outgoing party chief, President Hu Jintao - almost certain to be succeeded by Vice President Xi Jinping - who said in an earlier speech to the congress that China would stick to policies fostering sustainable, long-term economic development with the aim of doubling GDP over the 10 years to 2020.

(Writing by Nick Edwards; Editing by Sanjeev Miglani)