RESERVES SHIFT?

Zhou, choosing his words carefully, dropped a hint that China has been diversifying its $1.07 trillion stockpile of reserves, which bankers assume are invested largely in dollar assets.

Asked whether China was buying more Asian currencies and the euro, Zhou reiterated China's long-standing policy of managing the reserves with a view to safety, liquidity and returns.

"If you just imagine, you can know what should be done about that," he said. "But if I say here what should be done, it could easily have an impact on the markets. And it wouldn't be appropriate to trigger unnecessary fluctuations in the market."

Zhou described the current level of official interest rates as appropriate following two increases last year to cool the economy and keep credit growth in check.

"But I'm not saying I'm ruling out the possibility of another interest rate adjustment, because a central bank will never rule out the possibility of using a monetary instrument," he said.

Speculation has been rife that another increase could be needed if inflation accelerates in order to keep after-tax bank deposit rates positive in real terms.

One-year certificate of deposits yield 2.52 percent before tax compared with annual inflation in January of 2.2 percent.

Zhou acknowledged that price pressures would be a key factor in shaping the interest rate outlook and described the current inflation rate as a little high.

Before falling back to 2.2 percent in January from a year earlier, consumer prices had risen 2.8 percent in December.

"From the end of last year until now, it has gone a little higher and it will require continued monitoring," Zhou said.

He said the PBOC also needed to take growth and conditions in the banking system into account in setting interest rates.

Turning to an order issued on Friday to domestic and foreign banks to sharply reduce their short-term foreign borrowings, Zhou said the curb would not impair foreign banks' ability to do business in China.

A foreign banker told Reuters that this could be the case because foreign banks have few retail deposits and are limited in how much they can borrow from the domestic money markets.

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