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China's Economy Sizzles, Grows By 11.1 Percent in First Quarter; Some Worried About Inflation

China's sizzling economy surged 11.1 percent in the first quarter, causing the country's Cabinet to declare Thursday it will take steps to keep the economy from overheating.

The pledge by the State Council came after the government announced that inflation rose to its highest level in more than two years.

"If this type of fast growth continues, there is the possibility of shifting from fast growth to overheating. There is that risk," Li Xiaochao, spokesman for the National Bureau of Statistics, told a news conference.

Worries that Chinese authorities would raise interest rates to curb growth in Asia's second-biggest economy prompted regional stock markets to drop sharply. European markets also opened lower.

The consumer price index in March rose 3.3 percent, data showed, above the government's 3 percent target. And fixed-asset investment countrywide grew a robust 23.7 percent during March.

A statement posted on the council's Web site following a meeting chaired by Premier Wen Jiabao said the government will work to "reduce the country's large trade surplus, limit rapid growth in house prices and maintain basic price stability."

Asian markets fell ahead of the report's release in anticipation that the numbers would be stronger than expected and prompt Beijing to act to restrain growth in China, a major regional trading power. The nervousness was increased because Beijing delayed the release of the figures by five hours without an explanation.

As it turned out, quarterly gross domestic product did beat the forecast for 10.3 percent growth, according a poll of economists by Dow Jones Newswires. It was the highest growth rate since the second quarter of last year, when growth reached 11.5 percent, the fastest in a decade.

Beijing has already raised interest rates three times in the past year and imposed investment curbs on real estate, the auto industry and other fields.

While China's leaders want rapid growth to reduce poverty, they also are trying to slow an investment boom in real estate and other industries where they worry that overspending on unneeded factories and other assets could ignite inflation or a debt crisis.

Concerns about inflation are likely to grow after CPI rose to its highest since hitting 3.9 percent in February 2005.

Inflation in the first quarter was 2.7 percent, up 1.5 points compared with the same period last year. China has said it wants to keep inflation under 3 percent for the whole year after it increased 1.5 percent in 2006.

Economists projected another rate hike would be coming soon.

"The stronger-than-expected data suggest that the government will likely introduce another round of tightening measures very soon which, on top of a rate hike, may include further hikes in the reserve requirement ratio" and other measure to cool investment, economist Mingchun Sun at Lehman Brothers in Hong Kong wrote in a report.

Li, the bureau spokesman, said the government will take "appropriate" macro-adjustments. He also said first-quarter investment in real estate development was up 26.9 percent over the same period last year.

Investors in China and around the region worried that steps to restrain investment would hurt business prospects.

Shanghai's benchmark index — which had set records for most of the last two weeks — tumbled 4.5 percent, while stocks in Japan fell 1.7 percent and those in Hong Kong dropped 2.3 percent. European markets also opened lower.

No forecasts for the full year were given by the statistics bureau, but Stephen Green, chief economist at Standard Chartered Bank in Shanghai, wrote in a report that first-quarter growth was higher than his "bullish expectations" and that he had raised his forecast for 2007 GDP growth to 10.6 percent from 9.6 percent.

The news on China's growth comes amid increased trade tension between Beijing and Washington, with the U.S. threatening to impose punitive tariffs on Chinese goods if it doesn't end currency controls blamed for the surpluses.

Last year, the United States reported a record $232.5 billion trade deficit with China.

U.S. critics contend China's currency, the yuan, is kept undervalued, giving its exporters an unfair price advantage and adding to its trade surpluses. Beijing has let the yuan rise 4.6 percent against the dollar since a revaluation in July 2005, but Washington wants faster action.

Beijing says it is trying to close the gap by cutting export rebates and taking other steps.