By Simon Rabinovitch BASEL, Switzerland, May 6 (Reuters) - Chinese central bank chief Zhou Xiaochuan acknowledged on Sunday that a bubble in the country's stock market was a concern and said the central bank was monitoring asset prices along with inflation. China's main stock index, the Shanghai Composite Index <.SSEC>, has surged about 235 percent since the start of 2006 and more then 40 percent so far this year, but has also shown some volatility, including a 9 percent fall in February that led to market declines worldwide. Reuters Pictures Photo Editors Choice: Best pictures from the last 24 hours. View Slideshow The values of many stocks relative to company earnings are high compared with international benchmarks and historical levels. Asked if he was concerned about the build-up of a bubble in China's stock market, Zhou said, "Yes." "For currency stability, we watch over CPI (Consumer Price Index), PPI (Producer Price Index) and also asset prices," said Zhou, governor of the People's Bank of China. China's growing trade surpluses with the United States and the European Union have led to massive cash inflows, which have fuelled rapid growth in loans and investments but also led to nervousness about the sustainability of China's economic boom. Zhou has said before that China would continue to develop its capital markets to enhance their role in providing financing to the economy. That has been taken to mean that authorities want to see a continuation of the stock market's long-term upward trend. He spoke on the sidelines of a central bankers meeting at the Bank for International Settlements in the Swiss city of Basel. WATCHING INFLATION Reuters Pictures Photo Editors Choice: Best pictures from the last 24 hours. View Slideshow Zhou also said he expected China's inflation in 2007 to be higher than in 2006 but that the situation was still manageable. "There is no evidence to say inflation is out of control," he said. "We are very closely watching annual inflation rates." Annual consumer price inflation hit 3.3 percent in March, the first time it climbed above 3 percent in more than two years. Zhou said the "seasonal character" of China's inflation pattern meant prices would probably decline in the second quarter of the year. The Chinese New Year celebrations helped drive prices higher in the first quarter. The central bank, in an effort to rein in liquidity, has over the past year raised interest rates three times and increased banks' required reserves by seven times, most recently in late April. Rising inflation has fed the belief that China may take more tightening steps. Asked if China would consider further interest rate hikes to dampen liquidity, Zhou said it was "not convenient" to talk about rate policy.