China must battle inflation, fend off shocks: Zhou

WASHINGTON (Reuters) - China's economic outlook is positive, but it must keep battling inflation and be ready to counteract any external shocks, the country's top central banker said on Saturday.

People's Bank of China Governor Zhou Xiaochuan said China needed to stay flexible in its economic policies -- a signal that it could consider new stimulus measures.

"High inflation remains the top concern," Zhou said in remarks to the International Monetary Fund's steering committee.

"More flexible measures will be taken in response to unpredictable changes in the world economic and financial developments," Zhou said. "Efforts will be made to bring down inflation in the short term without major disruptions to growth, while facilitating transformation of the growth pattern over the medium and long term," he added.

China's importance as an economic engine for the world has been amplified at this week's meetings of Group of 20 major economies and the IMF. Officials have called for China and other major emerging markets to boost domestic consumption to help maintain global growth amid turmoil in Europe and weakness in the United States.

Zhou said on Thursday that the major emerging markets should find ways to boost internal demand.

Officials from the Group of 20 major economies and the IMF, at meetings this weekend, discussed the need for China to boost its domestic consumption in order to help maintain global growth amid weakness in Europe.

With $3.2 trillion in reserves, Beijing has ample firepower should it choose to spend more, but it would have to be careful to avoid side effects such as more inflation and overinvestment in some projects.

SPEND IT ON CONSUMPTION-IMF

IMF officials said on Saturday that Beijing would be better served if any new stimulus spending is aimed at consumers, not increased investment and bank credit, the International Monetary Fund said on Saturday.

Anoop Singh, the director of the IMF's Asia and Pacific Department, said China had room for such spending, but this would likely only be needed if its growth was severely hit by a systemic crisis in Europe that also weakened U.S. demand.

"Our sense is that China has room to return to greater fiscal stimulus if needed. Our sense is that it will help them if this is done through consumption," Singh told a news conference.

IMF officials said that spending it on reduced employment taxes and direct transfers to lower income people would avoid excesses that could result diverting it toward bank credit and investment projects. It also could be used to help build up more of a social safety net, which would build Chinese consumption over time.

Even so, new spending would likely have less impact on the global economy than a previous round of nearly $600 billion in stimulus had in 2008, Singh said.

He added that Beijing's top priority was to address inflation and overheating pressures, including ensuring that credit quality does not deteriorate.

"In China, it is very important that the People's Bank set a clear target for its growth of bank credit for this year," Singh said. "And it's also very clear that China's addressing its inflation...remains the top priority."

He said that any new stimulus from Beijing, however, would likely have less of an impact on global growth than a previous round of spending in the 2008-2009 timeframe.

(Reporting by David Lawder and Frank Tang, Editing by Chizu Nomiyama)