WRAPUP 2-China declares economic recovery, eyes inflation risk

* China declares victory over economic downturn

* Cabinet puts inflation back on policy agenda

* Change of language flags gradual shift in policy stance

* Banks told to rein in lending and beware of risks

By Aileen Wang and Simon Rabinovitch

BEIJING, Oct 21 (Reuters) - China on Wednesday voiced confidence that the economy has recovered from the global financial crisis, sending its clearest signal yet that it might gradually unwind its ultra-loose pro-growth policies.

The State Council, China's cabinet, said the economy had performed better than expected in the first nine months of the year and that recovery had been "consolidated".

The language marks a shift from the cabinet's repeated insistence in recent months that the world's third-largest economy, though turning for the better, had "not yet consolidated its recovery" or was not yet on a solid footing.

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"It sends out a clear message that growth is no longer a problem for the Chinese economy," said Zhang Xiaojing, a researcher with the Chinese Academy of Social Sciences, the government's top think-tank.

But the cabinet also pledged consistency, reaffirming the "active fiscal policy and appropriately loose monetary policy" it adopted after exports plummeted a year ago when the Lehman Brothers collapse brought the financial crisis to a climax.

China has put this stance into practice with a 4 trillion yuan ($585 billion) stimulus package and an unprecedented surge of bank lending.

However, the statement also put inflation squarely back on the government's agenda, saying it was important to manage inflation expectations in coming months alongside securing steady economic growth.

Zhang said China's policy was now entering a period of normalisation, though a blanket tightening was still not on the cards.

"Since the State Council has highlighted the inflation issue, the central bank will have to react," Zhang said. "At the very least, fine-tuning will be more apparent."