BEIJING, March 13 -- China will give priority to boosting domestic demand over increasing exchange-rate flexibility as it moves to resolve its massive trade surplus,central bank Governor Zhou Xiaochuan said Monday.

    "The most effective way to reduce the imbalance is to use policies to adjust the economic structure," Zhou told a news conference in Beijing during the ongoing annual meeting of the National People's Congress.

    "The first of these policies is to shore up domestic demand, especially to bolster domestic consumption and develop the services sector."

    Other measures that could be employed to restructure the economy include spurring imports and encouraging Chinese enterprises to set up factories abroad, Zhou said.

    "These measures might take a longer period to bear fruit, but they are very important and should be given priority consideration," Zhou said.

    As a "complementary" measure, the exchange-rate policy can also play a role in helping to adjust the balance between imports and exports, Zhou acknowledged.

    In addition, the country can alter the management of its foreign reserves to provide convenience to enterprises that want to invest abroad, he said.

    China's trade surplus swelled 74 percent to 177.5 billion U.S. dollars last year and exceeded 140 billion U.S. dollars with the United States, which caused some Western politicians to call for a faster rise in the value of the yuan.

    The People's Bank of China in July 2005 scrapped a direct peg between the yuan and the US dollar. The Chinese currency, allowed to move 0.3 percent a day on either side of a parity rate based on quotes from market-maker banks, has since risen 6.5 percent.

    Zhou said last week that a wider trading band for the yuan is possible.

    "Time is still needed to gradually adjust and finally solve" the problem of trade imbalances, he said yesterday.

    The central bank chief reiterated that the central bank will continue to use measures including bill issuance and hikes in lenders' required reverses to mop up excess liquidity.

    In addition, the country plans to bail out more financial institutions and allow more lenders to diversify into the fund-management business this year, according to Zhou.

    Asked whether he agreed that a stock stumble in Shanghai late last month was the trigger for a global decline, Zhou didn't directly respond, but he noted that multiple factors affect equity performance.

    "China used to think that its (capital) market was a relatively small one, a fledgling market still under construction," Zhou said.

    The interrelation of the recent volatility around the world "shows the need for China to step up efforts to expand its markets," he said.

    (Source: Shanghai Daily)