While the Chinese economy faces a favourable domestic environment for stable growth this year, challenges such as imbalances in international payments are still ahead, said the People's Bank of China.

The nation's central bank said that rapid increases in household income and residents' intentions to upgrade TVs and other goods will help boost domestic spending.

This will cause a much-desired shift from an export-led growth model to one based on domestic demand, the bank said in its 2005 fourth-quarter monetary policy report.

But "it is important to note that the deep-rooted problems in the economy are not yet solved, and new problems may emerge," it said, pointing out pollution and low-efficiency and high-cost of energy in the current growth model.

"The effectiveness and flexibility of monetary policy is facing the challenge of imbalances of international payments," the bank added, referring to the nation's trade surplus that has forced it to issue more money to keep the floating band of the renminbi exchange rate.

It also named the fulfilment of World Trade Organization commitments in the financial sector as a major challenge this year. Foreign banks will be granted full access to the local market by the end of 2006.

"Financial enterprises will face more intense competition, and the task of financial reform, opening up and development is very arduous," it said.

Source: China Daily