China won't relax policy -ex-central banker Wu

BEIJING, Feb 2 (Reuters) - The People's Bank of China has no intention of relaxing monetary policy because the risk of broad-based inflation is still serious, a former central banker said on Saturday.

Economists have started to speculate that the central bank might soon end its three-month-old tightening campaign to support economic growth in the face of weakening export demand and disruptions to output caused by blizzards across southern China.

But Wu Xiaoling, who retired recently as a vice governor of the PBOC, said it was important to keep a grip on the money supply in particular when inflationary pressure is on the rise.

"I want to stress this because recently there have been some media appealing -- incorrectly -- for the central bank to relax its controls," Wu told a financial forum.

She said monetary policy would rely more heavily on the exchange rate, open market operations and reserve requirements in 2008 as U.S. interest rate cuts had reduced the PBOC's room to manoeuvre on rates.

"The U.S. rate cuts have narrowed the scope for the Chinese central bank to use interest rates as an economic control tool," she said. "China will make more use of quantitative tools and the exchange rate mechanism in adjusting the economy."

Wu, who will become a lawmaker, said China would not decouple from the U.S. and the global economy, so any slowdown in the rest of the world would have an impact on China.

But she said a slowdown would give China an opportunity to hasten the shift in its growth model away from exports.

"For China, the biggest challenge is not a drop in external demand but rather domestic restructuring," Wu said, adding that wages and resource prices should be allowed to rise over the longer term.