China c.bank to stick to tightening path

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BEIJING, Sept 28 (Reuters) China will keep to its path of moderate monetary tightening to prevent the world's fourth- largest economy from overheating, the central bank said on Friday.

In a statement issued after the third-quarter meeting of its monetary policy committee, the People's Bank of China reaffirmed its intention to let supply and demand play a greater role in setting the value of the yuan -- a long-standing demand of Washington and Brussels.

But using its stock language on the currency, the PBOC said it would keep the yuan's exchange rate basically stable at a reasonable, balanced level even while permitting more flexibility.

The PBOC said it would moderately reinforce its macro controls to keep money supply and credit growth within reasonable ranges. The PBOC has raised interest rates five times and banks' required reserves seven times so far this year, The bank is struggling to cap consumer inflation, which reached a decade high of 6.5 percent in the year to August, and to restrain an economy that expanded 11.9 percent in the second quarter from a year earlier, the fastest pace since 1995.

''The problems of excessive growth in investment, the trade surplus and credit are still striking, and in addition there emerges problems of continued rises in inflationary pressure and asset prices,'' the statement, issued on the central bank's Web site, said.

The PBOC stressed the importance of monitoring consumer and asset prices.

In a departure from the routine language of its quarterly statement, the PBOC said the crisis in the U.S. subprime mortgage market had had only a limited impact on China, although it was important to keep track of the fallout.

''China needs to pay close attention, in the next phase, to the influence of the U.S. subprime mortgage market on international financial markets and its possible impact on our country,'' the PBOC said.

China's banks have acknowledged some exposure to subprime home loans, but capital controls have shielded the economy from the repercussions of a wave of defaults, which have led to a tightening of credit conditions across the globe.

REUTERS DKS HS1708

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