China's economy is expected to grow by a modest 8.5 percent next year while inflation will be subdued at about 2.5 percent, indicating that monetary policy should remain appropriately loose to solidify the basis of the recovery, a key government think-tank said on Monday. The State Information Center added that the risks of rapid credit growth could be contained and that a tightening of monetary policy would have only limited effectiveness in curbing asset price bubbles, in a report carried by the official China Securities Journal.

China's economy has picked up over the course of the year, with third-quarter GDP growth rising to an annual 8.9 percent from 7.9 percent in the second quarter and 6.1 percent in the first, virtually assuring China of reaching its 8 percent full-year target.

But top Chinese officials have stated that China would stick to its active fiscal policy and loose monetary measures even though its economic recovery is now on more solid footing.

The State Information Centre's report warned that China's economy, which relied heavily on government stimulus for its recovery, faced major risks, and that if private-sector investment proves unable to follow through in a timely manner to take over from government spending, the economy runs a real risk of faltering once more.

Monetary policy cannot be shifted before economic growth has completely stabilized, and in order to ease inflationary pressures, monetary policy should revolve around absorbing excess liquidity, relying on open market operations for fine-tuning.

It added that, amid a rapid rise this year in China's new bank lending, even if bad loans emerge they can be largely kept under control, with no great systemic risk.

The report also presented a variety of scenarios, including the possibility of a stable recovery with increased inflationary pressures, in which case the government should have in mind a potential exit strategy from its loose monetary policy.

(Reporting by Samuel Shen and Edmund Klamann; Editing by Ken Wills)

China Inflation