(May 9 )(Bloomberg) -- China will maintain a tight monetary policy to cool price increases and prevent economic overheating, Vice Premier Wang Qishan said.

``China's economy is still facing challenges this year including high inflation, investment growth that hasn't yet come down to a normal level and the global economic slowdown,'' Wang said at the Lujiazui Financial Forum in Shanghai today.

The government wants to tame inflation that has accelerated to the fastest pace in 11 years and prevent waning exports triggering an economic slump. The world's fourth-largest economy expanded 10.6 percent in the first three months of 2008 from a year earlier, the ninth straight quarter of growth of more than 10 percent.

The nation has made concrete progress in exchange-rate reform and needs to open financial markets gradually, Wang said.

``Safeguarding financial stability and preventing risks will be one of our policy priorities,'' Wang said. ``The subprime crisis, globalization of financial markets and financial product innovation have magnified financial risks to the world as well as China.''

China's economy is flooded with cash from the trade surplus, foreign direct investment and inflows of capital from investors attracted by a strengthening currency and interest rates that increased six times last year.

Falling Dollar

``The falling U.S. dollar exchange rate and interest rates and excessive global liquidity'' require China to take extra steps to safeguard financial stability, Wang said. ``If we don't handle financial risks well, this could cause turbulence in the overall economy and undermine social and political stability.''

The People's Bank of China has kept interest rates unchanged this year. The key one-year lending rate is 7.47 percent and the one-year deposit rate is 4.14 percent.

The U.S. Federal Reserve has lowered its benchmark interest rate seven times since August as the worst housing slump in a quarter of a century and a credit squeeze erode growth.

Surging food inflation drove consumer price gains of more than 8 percent in February and March, outpacing the central bank's 4.8 percent target for the year. A government survey in March showed that the proportion of Chinese households that regard prices as ``too high to bear'' was the most since 1999.

The government has, from January, frozen price increases of fuel, electricity, tuition fees and public transportation fares and told some of the biggest makers of staple foods such as dairy products, cooking oil and instant noodles to apply for approval for price increases.

China may face increasing inflationary pressure from more expensive imports and higher production costs, Goldman Sachs Group Inc. economists Liang Hong and Song Yu said in a report on May 5. Oil prices in New York jumped to a record $123.93 a barrel on May 7.

(Editor: Jia Fu)