With the U.S. financial system still reeling and recession looming on Europe's doorstep, the world is looking to China as a calm port in the storm. But China has its own set of woes as clouds gather over its economy as a result of the domino effect from the overseas economic downturn and lingering inflationary fears. On October 26, Zhou Xiaochuan, Governor of the People's Bank of China, delivered a report on the country's current economic situation and the safeguards that the government has put in place to fend off economic risks. Excerpts follow.

The Chinese economy has remained largely steady despite the growth-retarding shock emanating from the United States. Among the bright spots of the economic situation this year was the consumer market, which has picked up some of the slack. Personal income, corporate profits and fiscal revenue have also reassuringly continued rising.

But as the recessionary fears that have taken hold in the enfeebled Western world now leak into China, it has been harder for Chinese policymakers to strike a balance between maintaining growth and stabilizing prices.

On the one hand, the U.S. economy is lurching closer to near stagnation, depressing the appetite for Chinese exports and thus painfully draining domestic growth. On the other hand, the inflationary jitters that used to be a long-time preoccupation of Chinese economists have not completely evaporated. Once credit in Western markets resumes flowing, international commodity price surges may come roaring back. Domestically, expectations for cost inflation still loom large. The producer price index (PPI), a barometer for inflation on the wholesale level, came in at a dizzying 9.1 percent in September, signaling pressures on consumer prices.

The overhang of uncertainties brings even more cause for concern. The external factors pushing up domestic consumer price index (CPI) and PPI are tapering off given that global commodity prices have dropped precipitously. Besides this, the CPI is likely to head lower since it has dropped continuously since April. Generally, the inflationary trend in the near future may be mixed and slippery until the big picture is on full display.

On the financial front, China is well-positioned to play defense against the swirling financial contagion thanks to its economic resilience. The domestic financial system remains afloat and healthy with financial institutions that have become more profitable and risk resilient. More importantly, as China is currently undergoing further urbanization and industrialization as well as upgrading its industrial restructures, it enjoys a vast domestic market, fairly sufficient capital and continually improved labor forces, which enable it to basically maintain the momentum of its economic growth.

For the next round of macroeconomic control, the central bank will carry out a set of flexible and prudent monetary policies with the following seven measures aimed at stabilizing prices and promoting economic growth.

First, it will put in place programs to counterbalance the credit crunch and improve financial oversight.

Second, it will improve the supplies and management of liquidity.

Third, the central bank will strengthen its "window guidance" to advise commercial banks about issuing loans and increase its flexibility on monetary policies to optimize the country's credit structure.

Fourth, it will enact supportive financial policies to rehabilitate earthquake-stricken areas.

Fifth, it will tighten the financial oversight of the real estate market and improve financial services for the sector.

Sixth, it will enhance the regulatory role of price levers and press ahead with interest rate marketization and the reform of the renminbi exchange rate system.

Seventh, it will reinforce the management of foreign exchange and guard against the impact of speculative hot money.