Zhou acknowledged the debate raging between countries about the global imbalances caused by some countries running large export surpluses, and said there was already a shift underway in China from manufacturing to services.

"I think it is possible but it will take a long time," he told the Eurofi G20 seminar on the sidelines of a Group of 20 meetings finance ministers and central bankers.

He said it involved not only retooling factories, but changing whole supply chains and retraining workers.

"This kind of cycle is over a period of 10 years," said the Chinese central banker.

He said during this period Chinese manufacturers would likely continue to export and improve their productivity.

Zhou said appreciation to date of the yuan has shown that Chinese manufacturers have been able too adjust and make productivity gains.

"I think that means they have room to improve and survive," he said.

He said Chinese exporters have told the central bank that even with a rising yuan they would only shift around up to 20 percent output.

"They say exports are still more profitable than the domestic market," said Zhou.

He said the country's economy is already shifting more towards the service sector, saying that according to the most recent data only 10 percent of loans went to manufacturing compared to levels of over 50 percent in the 1990s.

On Monday China announced that its politically sensitive trade surplus shrank in January, but analysts warned the data may have been skewed by a surge in imports leading up to the Lunar New Year holiday.

The trade surplus fell 53.5 percent to $6.45 billion in January as th exports and imports grew strongly ahead of the holiday, the General Administration of Customs in Beijing said.

That data came hours after Tokyo confirmed China had surpassed Japan as the world's second biggest economy and as economists look to the release on Tuesday of January inflation figures at a time when Beijing is trying to rein in prices.

earlier related report
Brazil keeps focus on China, Iran under new leader
Brasilia (AFP) Feb 18, 2011 - Brazil Friday set out its foreign policy aims under new President Dilma Rousseff, talking up China ties, blaming rich countries for hampering global trade talks, stressing dialogue with Iran, and saying it sees itself as an agent for "world peace."

The major lines, announced by Foreign Minister Antonio Patriota to state media, showed Rousseff staying pretty much on paths blazed by her predecessor and mentor Luiz Inacio Lula da Silva, whom she succeeded last month.

They did, however, reinforce the ambition of Latin America's preeminent power and the world's eighth biggest economy of gaining diplomatic heft commensurate with its growing financial might.

Brazil's relationship with China -- the main customer for Brazilian raw materials such as iron ore -- was given special attention, ahead of a trip Rousseff is to make there April 13-15 for bilateral talks and a BRIC summit.

"The relationship with China is increasingly important for Brazil," Patriota said.

China's strong demand largely underpins Brazil's own economic performance, though unease is building over foreign exchange policies which have seen Brazil's currency, the real, soar against the US dollar and the Chinese yuan, and cheap Chinese imports that are undercutting Brazilian manufacturers.

On Iran, Patriota said Brazil would maintain the dialogue started under Lula.

"We consider it in our interest to maintain a dialogue with the Iranian government, including as a way to reduce tensions, because isolation sometimes only exacerbates a worrying situation that could lead to a conflict," he said.

The relationship with Tehran contributed to Brazil's aim of "contributing to world peace," he said.

Lula and Iranian President Mahmoud Ahmadinejad had friendly ties, underlined when Brazil and Turkey last year extracted a concession from Tehran to engage in a nuclear fuel swap deal.

That deal was ultimately shot down by the United States, which secured a new round of sanctions against Iran in the UN Security Council as part of a campaign to pressure Iran over a suspected nuclear arms program.

Rousseff will have an opportunity to explore the issue of Iran further when she hosts a visit by US President Barack Obama next month. Her office said Obama would speak with her in Brasilia on March 19.

Brazil hopes to "give the greatest possible content and substance to that visit," with talks not only on trade but also the desire "to deepen political dialogue" with the United States, Patriota said.

But stalled global trade talks was still an issue nettling Brazil, which has long lobbied for emerging nations to have greater access to European and US markets.

"We are ready to resume Doha Round negotiations," Patriota said.

"We don't think it reasonable for developed countries, the United States in particular, to demand additional concessions other than those discussed in 2008" when the talks hit an impasse, he said.

Brazil's president also wanted to make clear that ties with South America remained at the forefront of her mind, as shown by a recent visit to Argentina.

"South American integration is a priority," the foreign minister said, underlining the potential of the regional trade bloc Mercosur and the Union of South American Nations forum.

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