Construction is booming as the economy expands

An investment boom and soaring consumer demand meant the first three months of 2004 saw annual growth rates of 9.8%.

China's response - curbing bank lending and spending on construction and other hot sectors - is working, said Vice-Premier Huang Ju.

But observers warn that rising inflation means interest rates are still likely to have to go up.

And even Mr Huang acknowledged that the rapid pace of growth experienced during the past year was not going to slow down immediately.

The 9.8% first quarter growth number marked a fresh economic spurt, even faster than the 2003 growth rate of 9.1%.

Inflation fears

Of more concern is the jump in consumer prices, up 3.8% in April on the same month a year ago, for the fastest rise in seven years.

The government has suggested that inflation will only become a major problem if it reaches 5%.

And for the moment, said central bank governor Zhou Xiaochuan, it is merely "monitoring" the situation.

But analysts think that a change of interest rates is inevitable.

"I think they still need to raise interest rates, mainly because real interest rates are negative," said Michael Spencer, chief economist at Deutsche Bank in Hong Kong.

"I don't expect inflation is going to fall back below 2%."

But higher rates could spell trouble for many of China's highly indebted companies, and could choke off consumer demand.

Fears about the impact of a rate rise in China - allied with expectations that the US is also on the verge of raising the cost of borrowing from its current half-century low - were one factor in sharp falls on global stock markets earlier this month.