By Krista Hughes
BASEL, Switzerland, Sep 10 (Reuters) Central bank officials from the world's developed and emerging nations are assessing signs of a slowdown in the fast-expanding global economy as a result of months of credit tightening at a two-day meeting which started on Sunday.
Central banks around the world are in the process of draining liquidity pumped into markets after the 2001 stock market crash.
The Federal Reserve raised interest rates 17 times since mid-2004 before pausing in August, while the European Central Bank is expected to tighten further after four rate hikes since December.
The Bank of Japan raised rates for the first time in six years in July while China, the world's fourth-largest economy, also tightened twice this year.
Chinese central bank governor Zhou Xiaochuan said on Sunday China's red-hot economic growth was likely to ease in the rest of 2006 and 2007 after registering its fastest expansion in the second quarter in a decade.
''We see a slowdown a little bit this year (with still) relatively high growth rates in the second half of this year, and probably also next year,'' Zhou said on the sidelines of the bi-monthly G10 meeting at the Bank for International Settlements (BIS), a forum for the world's central banks.
Asked whether the global economy would slow in 2007, he said: ''That's a difficult question, the BIS meeting tomorrow morning is going to discuss the world economy, so I am going to learn from that.'' China raised interest rates again in August, has drained funds in open market operations and Zhou said liquidity was still ample despite tightened reserve requirements for commercial banks.
Zhou suggested more tightening was on the cards.
''Liquidity is still abundant in the Chinese economy so we are going to squeeze the liquidity. There are several ways -- we can either expand the operation on open markets, we could once again use reserve requirements, it's flexible. We are going to see the data ... and study it,'' he said.
Earlier on Sunday, China's Vice Premier Zeng Peiyan said the country's priority for the rest of the year was to rein in capital spending and it would rely more on monetary policy measures, rather than administrative curbs, to do so.
The world economy is expected to expand around 5 percent in 2006, but may ease somewhat next year as a cooler U.S. housing market takes its toll and many believe euro zone growth has already peaked.
YUAN AND G7 The meeting takes place just days before financial chiefs of the Group of Seven industrialised countries meet in Singapore. Investors are keen to know whether the G7 would renew its pressure on China to let its yuan currency rise to help correct global imbalances.
Zhou said Beijing was steadily making the yuan more flexible.
''If you put it together, actually we are steadily expanding the flexibility of the exchange rate ... It (the yuan) is in the process of strengthening,'' he said.
The yuan hit a post-revaluation high last week at 7.9367 per dollar, its highest level since it was revalued by 2.1 percent and depegged from the U.S. currency in July 2005.
Germany's Deputy Finance Minister Thomas Mirow said last week the G7 officials would discuss yen weakness at the G7 meeting.
European financial policymakers spoke out against rapid or messy foreign exchange movements on Friday, a week after the euro hit a record high against the Japanese currency.
Asked about yen weakness, European Central Bank President Jean-Claude Trichet and Eurogroup chairman Jean-Claude Juncker both said that market swings were unwelcome.
On Sunday in Basel, Bank of Japan Governor Toshihiko Fukui declined comment.
Trichet, who is the chair of the G10 meeting, will hold a news conference on Monday at around 1100 GMT on Monday.
REUTERS PKS PM2353