China has enhanced stability of its financial system as the economy grows steadily and rapidly, with the financial reform making substantial progress, the central bank has said.

"China is faced with a more complicated international environment in maintaining its financial stability and should keep a close watch on the spill-over effect of global financial risks," the People's Bank of China said in its financial stability report issued Friday.

This is the third such report issued by the central bank since 2005.

"The country needs to appropriately deal with the potential pressure on price stability," it said.

Special coverage: Markets Watch Related readings:  Inflation worries central bank  Top bank: economy expected to grow 10.8% in 2007  Central Bank: Large forex fluctuations harmful  China's securities industry to open up

The consumer price index (CPI) is expected to rise 3.2 percent for the whole of 2007, with its peak of 3.5 percent in the third quarter, according to the China Securities Journal, citing a report from the central bank's research bureau.

Food prices have climbed in China this year, pushing the country's CPI to 3.4 percent in May, higher than the government's warning level of three percent.

The central bank also said in its report China should strive to "develop a multi-level capital market" in order to let companies have more financing channels other than bank loans.

China's financial sector must maintain its stability and security as it fully opens to foreign competition, said the report.

As financial risks become increasingly complicated, supervision of the financial sector should be strengthened and a deposit insurance system should be established to protect depositors against losses, it said.

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