China's economic policy priority is to maintain relatively fast growth, but Beijing cannot lower its guard against inflation risks, the head of the country's top planning agency, the National Development and Reform Commission, said on Sunday.

First of all, we need to maintain steady and relatively fast economic growth -- development is the key for resolving all problems in China, Zhang Ping, NDRC chief, said in a speech.

Zhang said the government would maintain prudent monetary and pro-active fiscal policies, and stand ready to fine-tune settings -- a consistent refrain from China's leaders since the autumn of 2011.

He added that the growth versus inflation trade-off was a key policy challenge.

It's a dilemma to stabilize growth and stabilize inflation. Even though inflation has showed signs of stabilization, we cannot lower our guard against price rises, he said.

Currently, the situation concerning prices is still severe -- global liquidity is ample and global commodity prices are fluctuating at high levels. Pressures on prices will stay over the long term.

China's annual rate of inflation cooled to 3.2 percent in February, bringing it below the government's 4 percent target for the first time in more than a year, but policymakers remain particularly sensitive to elevated commodity prices, given China's huge imports of raw materials.

Statistics bureau data on Sunday showed that home prices fell 0.1 percent in February from January for a fifth consecutive month and are widely expected to continue declining, underscoring the success of efforts to curb speculation.

Premier Wen Jiabao said on Wednesday home prices were still far above a reasonable level and he would keep property tightening measures place in 2012.

China's trade balance plunged $31.5 billion last month into its largest deficit in at least a decade. Import growth of 39.6 percent on the year in February was the strongest in a year and more than twice the rate of export growth.

COMMODITY BUBBLE RISKS

China's top officials worry that huge injections of liquidity by U.S., U.K. and euro zone central banks to stabilize economies still struggling to overcome the aftermath of the 2008/09 financial crisis, are fuelling a speculative bubble in commodity prices.

Meanwhile, economists expect China's annual economic growth to slow to close to 8 percent in the first three months of 2012, down from 8.9 percent in the last quarter of 2011. That would be the fifth successive quarter of slower growth and leave China on track to end the year with its weakest expansion in a decade.

Premier Wen cut the official 2012 growth target to 7.5 percent earlier this month, down from the 8 percent targeted in each of the last eight years, in part to create leeway for reforms to underpin domestic demand and reduce dependence on exports and inflows of foreign capital.

Zhang said China faced many challenges in striking a balance between promoting economic growth, adjusting economic structures and controlling inflation.

Investment is still important for supporting economic growth and the government will open up the railways, the financial sector, the power industry, education services and medical care to private investment, he said.

Fixed asset investment, which accounted for 54 percent of China's economic growth in 2011, grew 21.5 percent in the first two months of 2012, slightly ahead of the 20 percent forecast.

Foreign direct investment (FDI) in February shrank from a year earlier, a fourth straight fall, with anemic inflows from Europe an additional sign that the People's Bank of China may have to act to ensure steady money supply growth.

China drew in $7.7 billion in FDI in February, down 0.9 percent on the same month in 2011, while January and February combined saw FDI flows fall 0.56 percent from a year earlier to$17.7 billion.

(Reporting by Kevin Yao; Writing by Nick Edwards; Editing by Don Durfee and Jonathan Thatcher)

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