In an interview with The Asian Wall Street Journal, Li Ruogu, assistant governor of the People's Bank of China, forecast the country's economy will expand around 7% this year compared with 8% last year. The slower growth, however, probably won't be drastic enough to prompt an interest rate cut, he said. "Economic growth will remain strong."

Mr Li, addressing a range of topics, also said the central bank has initiated a broad investigation into illicit bank flows into the country's stock markets. He declined to provide details, saying the probe is still continuing. But his comments confirmed that capital from China's state commercial banks continues to find its way into the country's securities markets, despite regulations aimed at halting the problem.

Such flows were one reason behind last year's surge in China's stock markets, which rose about 50%.

The investigation, Mr Li said, is part of a new emphasis the central bank is placing this year on improving management at financial institutions. After decades of central planning, Mr Li said China's banks and finance companies are struggling to improve internal management and set up controls that would prevent illegal lending. Many of these institutions must improve their management or they will face an uphill battle competing with foreign financial firms once China becomes a member of the World Trade Organisation, he said."Financial institutions remain the biggest risk for us," he said.

Mr Li said the central bank's two main priorities this year are deepening reforms at state-owned enterprises and pushing ahead with key financial reforms, such as liberalising interest rates that are now tightly controlled by the central bank. Though he declined to provide a specific timetable for complete interest-rate liberalisation-a change that is widely viewed as a precursor to full convertibility of the local currency-he suggested the reform may take longer than foreign analysts expect. Still, he said the central bank's attitude toward the reform is clear: "the sooner the better for us."

Reform of China's indebted rural credit cooperatives, where many of the country's 800 million farmers park their savings, is also a priority this year. He said reforming these institutions is critical to helping China's farmers gain better access to financing and increase their incomes. "The goal of this reform is to better serve our farmers...we want to increase their incomes," he said.

In another important reform, Mr Li said the central bank has forged ahead with plans that may potentially close dozens of struggling trust and investment firms. Two years ago, China's second largest trust firm, Guangdong International Trust & Investment Corp., was declared bankrupt due to excessive debts. That prompted a nationwide review of the sector that is now nearing completion. "We hope to finish the work this year," he said.

Mr Li also played down the impact that a slowing US economy will have on China and its financial reforms. Citing information from the US Federal Reserve, he said he expects the US economy will bottom out in the second quarter but that growth will pick up shortly after.

If that scenario unfolds and a US recession is avoided, he said, China will feel the impact only marginally. "The US is one of our top three trading partners, and we hold large sums of US dollars, so we hope (its) economy continues to see stable growth," he said.

Japan, however, remains a concern for China, Mr Li said. Yet, after surviving nearly a decade of Japan's economic slump, he believes China's economy has learned to cope without strong demand from Japanese importers. Along with the US, Japan ranks as one of China's top three trading partners.

"We hope their economy will recover in the next year or two," he said.Mr Li also said the central bank's own restructuring has boosted its ability to limit financial risks and regulate the economy. Two years ago, China's central bank shut down dozens of its subbranches and merged them into nine regional offices, a reform modelled on the US Fed. But Mr Li said he believes more work remains to improve regulation. "Reform is a long process, and we have to resolve problems from a realistic viewpoint," he said.