Chen Yulu, a professor at China's Renmin University and an academic adviser to the monetary policy committee of the People's Bank of China (PBOC), was speaking to reporters on the sidelines of a conference in the capital on global economic conditions and capital flows.

"We have indeed underestimated the severity of the external economic situation," Chen said, adding that the global economy could remain sluggish for an extended period.

Asked whether the PBOC would opt to boost the economy by further cutting interest rates or required reserve ratios (RRR) for banks to spur commercial lending, Chen said: "It will hinge on the degree of deterioration of the external situation."

The PBOC cut interest rates twice in June and July and lowered RRR three times since late 2011 freeing an estimated 1.2 trillion yuan ($190 billion) for new lending.

But it has held off on more aggressive easing measures since then, despite further signs of cooling demand at home and abroad. Instead, it has opted to pump short-term cash into money markets to ease credit strains, a move analysts say reflects Beijing's concerns about renewed property and inflation risks.

The central bank said on Tuesday that it will "fine tune" policy to cushion the economy against global risks while closely watching the possible impact from recent policy loosening in the United States and Europe.

REFORM, INFLATION RISKS

PBOC Vice-governor Liu Shiyu, speaking at the same event as Chen, said support for economic growth must be balanced by the need to curb inflation.

Chen reiterated the point, saying that policymakers were acutely aware of the risk of loosening policy too far and setting off another round of house price inflation in China.

"Monetary policy faces a dilemma. On the one hand it (the central bank) needs to stabilize economic growth and on the other hand, it's very worried about the problem of property prices," Chen said.

Chen said the use of money market operations was more reflective of the PBOC's push for financial sector reforms that let the markets take a more active role in setting the price of capital, saying the central bank could not simply loosen policy to boost the economy as it needed also to spur structural change.

"The adoption of reverse repos reflect this policy consideration," he said.

China's central bank injected a net 365 billion yuan into money markets this week, traders said, the largest-ever weekly injection, as regulators struggle to maintain liquidity without producing inflation as forex inflows slow.

Investors broadly welcome Beijing's plans for reform, but are concerned that the government's timing is off and that the economy could be derailed by a global economic downturn that has sapped overseas orders for exports from China's factories.

Liu sought to play down the risks facing China's economy, saying slowing growth this year was a desirable outcome of macroeconomic adjustments.

China's government has said repeatedly that it wants to steer growth lower to complete structural economic reforms after three decades of breakneck development that has seen annual growth average 10 percent.

Export growth this year is averaging around 7.8 percent versus 2011. August's growth slumped to 2.7 percent compared with a year ago and the Commerce Ministry sees a risk that things could get worse in the months ahead, jeopardizing the official target of a 10 percent year-on-year expansion of trade.

Exports generated 31 percent of gross domestic product in 2011 and supported an estimated 200 million jobs.

China's annual economic growth could ease to 7.4 percent in the third quarter - the seventh consecutive quarter of slowdown, before picking up to 7.6 percent in the final three months, according to the latest Reuters poll.

(Writing by Nick Edwards; Editing by Kim Coghill)

(nick.edwards@thomsonreuters.com; +86 10 6627 1270; Reuters Messaging: nick.edwards.reuters.com@reuters.net)

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