A better welfare system could enable the Chinese to spend more

But, while the figure slipped from 13.9% growth seen in June, sales remained strong, analysts said.

Economists warned not to read too much into the drop saying falling price inflation was probably behind the fall.

China is working to boost domestic consumer spending so it can rely less on external investment, analysts say.

Welfare system

"Income growth is strong so retail sales should hold in fairly firm," said Ben Simpendorfer, analyst at the Royal Bank of Scotland in Hong Kong.

Both urban and rural disposable incomes grew considerably in the first six months of 2006 compared to the year before - rising 10.2% and 11.9% respectively.

"China will continue to encourage domestic consumption," said Li Mingliang, an economist with Haitong Securities.

"But it faces tough competition, mainly due to the difficulty of increasing farmers' incomes and the lack of social welfare system in the rural areas."

Analysts predict consumer spending will rise in the latter part of this year, as the government invests more on health, education and housing, reducing the amount the Chinese should have to save to pay for these services.