China economy still needs policy support-PBOC's Zhou

BEIJING, Oct 9 (Reuters) - China will keep monetary policy flexible and pre-emptive to support activity in an economy still facing relatively big downward pressure, central bank governor Zhou Xiaochuan said.

Sustaining growth and pursuing financial reform was crucial for the country in the face of stiffening headwinds from financial crisis abroad, the People's Bank of China chief wrote in an article in the latest issue of China Finance magazine, published by the central bank.

"The external environment for our country's economic growth is very grim," Zhou said. "The impact from the international finance crisis is unabated and strengthening, and downward pressure on the domestic economy remains relatively big."

Given trying circumstances, Zhou said the central bank would seek to make policy more effective while providing stability.

"Whilst keeping the continuity and stability in monetary policy, the bank will make policy more preemptive, targeted and effective," he wrote.

China's economic growth limped to its lowest in more than three years in the second quarter as exports slowed and domestic demand struggled to take up the slack. Analysts polled by Reuters expect full year growth to be the weakest since 1999 at 7.7 percent.

The PBOC has responded by cutting interest rates twice, giving banks more freedom to set borrowing costs by liberalising rates at the margin and released an estimated 1.2 trillion yuan ($190 billion) for lending by lopping 150 basis points from required reserve ratios in three moves since November last year.

Zhou's call for Beijing to pursue financial reforms echoes a view resonating among experts that China risks economic malaise, deepening unrest and ultimately even a political crisis if incoming leaders do not push through stalled reforms.

China's ruling Communist Party holds a congress next month to ratify a new leadership line-up in a once-a-decade handover of power.

(Reporting by Koh Gui Qing; Editing by Nick Edwards)

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