China's economy expanded at its fastest pace in 13 years in 2007 even after a slowdown in the fourth quarter, amid rising inflation, official figures showed on Thursday.
 
The country's Gross Domestic Product (GDP) grew 11.4 percent last year from 2006, to 24.66 trillion yuan ($3.42 trillion), said Xie Fuzhan, head of the National Bureau of Statistics (NBS) at a press conference in Beijing.

That marked a fifth year of double-digit growth for the world’s fourth largest economy after the US, Japan and Germany. The increase was especially remarkable given the fact that the United States is experiencing a slowdown due to the sub-prime crisis and housing slump.

The sharp increase in output brought China closer to overtaking Germany as the world's third-largest economy after the United States and Japan.

Coupled with China's phenomenal growth was accelerating inflation which hit 4.8 percent for the whole year, far above the central bank’s target of three percent.

The monthly CPI for December dropped slightly from the previous month to 6.5%, but it was still at a fairly high level. The government has announced a series measures to bring down the consumer prices before the traditional Chinese holiday, the Spring Festival which begins on February 6.

GDP expansion slowed down to 11.2 percent in the October-December period, Xie said, thanks to the tightening measures by regulators. The People's Bank of China (PBOC), the central bank, raised interest rates six times and hiked the bank reserve ratio 10 times in 2007, in addition to capping bank loans.

The PBOC will continue to rein in credit, as part of a "tight" monetary policy adopted by policymakers to keep the economy from overheating and to tame inflation.

As part of the monetary tightening, the PBOC last week ordered the commercial banks to set aside a record 15 percent of their deposits as reserves, up from 14.5 percent.
 
However, several analysts expect a slight ease in monetary policies later this year due to the impact of a possible global slowdown on China's economy.

"The central bank is now very aggressive in tightening, but within three months' time, four months' time, we expect much more relaxed policies from the government," said UBS economist Jonathan Anderson, according to earlier reports.

Professor Zhou Chunsheng of the Cheung Kong Graduate School of Business agreed.

"Given domestic and global factors, I think China will go ahead with tightening moves only in the first half [of 2008]. In the second half, I expect the tightening policies will be relaxed or even totally given up," he said.

Fears are mounting in the US that the world's largest economy will slide into a recession, prompting the Federal Reserve to announce a 0.75 percent cut in the federal funds rate on Tuesday.

That was the biggest cut in two decades and the first between scheduled meetings of the Federal Open Market Committee since the 2001 terrorist attacks.

According to Citigroup estimates, each one percent drop in the US economy will shave 1.5 percent off China's growth, as Americans are heavy users of Chinese products.

"If US consumption really comes down, that's bad news for us," said Zhang Tao, deputy head of the PBOC's International Department during the weekend. "That will have a pretty severe impact on our exports."

In spite of the uncertainties, the country’s economy is widely expected to post its sixth year of double-digit growth in 2008 on investment and exports.

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