BEIJING (Reuters) -China's yuan will stabilise after improvements in recent economic data and the bottoming out of domestic prices, state-owned media said on Monday.

China's falling interest rates have effectively stimulated market demand and supported the economic recovery, the Financial News, a publication backed by the People's Bank of China (PBOC) said.

"The exchange rate is a reflection of the overall economy, and internal and external factors," the newspaper said in a commentary published on its official WeChat account.

"With continued improvements in internal and external fundamentals, the yuan exchange rate is stabilising on a firmer footing."

A string of economic data including August credit lending growth, factory output and retail sales showed the world's second-largest economy was picking up steam.

China's consumer prices have returned to positive territory in August while factory-gate price declines slowed.

"With domestic prices showing upward momentum and the dollar nearing the end of its tightening cycle, yield differentials between the United States and China are expected to narrow, and the yuan will show a positive upturn after bottoming out," the state media said.

In the meantime, China's yuan has bounced 0.9% to the dollar since it touched a 16-year low earlier this month, partly due to the central bank's intensified efforts to stem rapid declines. [CNY/]

The PBOC has persistently set firmer-than-expected daily fixing to cap the downside room in the yuan, and it lowered the amount of foreign exchange banks must set aside last week to slow the pace of yuan depreciation.

(Reporting by Albee Zhang and Ryan Woo; Editing by Jacqueline Wong and Stephen Cates)