BEIJING (Reuters) -China will use effective investment to help the economy recover and will not resort to flood-like stimulus, state media said on Friday, following a cabinet meeting chaired by Premier Li Keqiang.

The world's second-largest economy narrowly avoided contraction in the second quarter due to widespread pandemic lockdowns. Analysts said Beijing's full-year growth target of around 5.5% had been looking increasingly unattainable under Beijing's strict zero-COVID policy.

To spur demand, China urged local governments to speed up the use of special bonds for infrastructure that are mature and profitable, but such bonds should not be used for land reserves or to make up the gap between local fiscal revenue and expenditure, state media said.

To spur consumption, China will extend an exemption on purchase tax on new energy vehicles, following a cut to the car purchase tax.

China will promote consumption to be the major economic driver continuously, state media reported.

As shoppers tighten their belts, policymakers have found it harder to revive retail consumption this year – a sector that contributes more than half to the economy and a major source of employment.

In the first half of this year, retail sales dropped 0.7% from a year earlier as many consumers were confined at home amid strict anti-virus measures.

The economy is in the critical window of stabilisation and recovery, and the third quarter is vital, according to a Wednesday meeting of the country's top economic planner.

(We should) seize the time window of the peak season for construction in the third quarter, improve work efficiency and help create jobs for local people nearby as much as possible, said a Friday statement of the meeting by the National Development and Reform Commission.

(Reporting by Ellen Zhang and Ryan Woo; Editing by Frank Jack Daniel and Nick Macfie)