Monday August 31, 02:10 PM

Reuters Summit - Chinese growth can overcome falling stock market

By Shen Yan and Simon Rabinovitch

BEIJING (Reuters) - China's economy should be undented by the steep fall in the country's stock market, but private investment and consumption must pick up for the recovery to be sustainable, a senior government economist said on Monday.

Chen Dongqi, vice-head of the macro-economic institute under the National Development and Reform Commission (NDRC), said the government should not make policy decisions based on volatile stock market movements.

Beijing would hold fast to its "appropriately loose" monetary policy until the recovery is on solid ground, he added in comments at the Reuters China Investment Summit.

"There is pessimism for the market to have fallen so much in one month," Chen said at the summit in Reuters offices in Beijing. "But this should not change the trend of the economic recovery."

The stock market fell 22 percent in August, its second-biggest monthly loss in 15 years.

"Sometimes rises in the market are irrational and sometimes falls in the market are irrational," he said.

"How should government policy respond to this? Premier Wen (Jiabao) has already said many times that we will unswervingly apply an appropriately loose monetary policy, and there is no change here, and this is the way it should be."

He said the four biggest challenges faced by China's economy were: declining exports; negative inflation; stable but weak consumption; and a lack of private investment.

Stimulus spending by China's government and a surge in lending by its banks powered the economy to 7.1 percent annual growth in the first half after the global financial crisis slowed it to a crawl at the end of last year.

Wary of over-confidence, officials have repeatedly said that the recovery is not yet on firm ground, and the plunge in the stock market has fuelled concerns about the possibility of a double-dip in economic growth.

Looking to global markets, Chen said Beijing should press Washington to guarantee the safety of Chinese investments in U.S. assets.

Premier Wen said earlier this year that China was worried about China's heavy exposure to the United States. Bankers assume about two-thirds of China's more than $2 trillion in reserves is parked in dollar assets, primarily U.S. government and other bonds.

"I personally have lots of concerns because the U.S. has huge piles of debts. Even though the economy is large, it is relying on debts, so its foundation is shaky," Chen said.

He said monetary easing by the Federal Reserve had sown the seeds of inflation and that the U.S. government should issue more inflation-protected products to China.

"China's money is hard-earned from selling socks, buttons, zippers, bras and furniture," he said. "You should at least guarantee the value of our investments."

(Additional reporting by Zhou Xin)

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