China's economy is booming into its new year

The State Information Centre puts the fall from 10.4% in the last quarter of 2006 down to government policies to cool China's rapid economic expansion.

The measures by Beijing include higher interest rates. The think-tank wants rates to rise further in 2007.

It also expects a slight dip in exports will further help cool the economy.

The State Information Centre says China needs to increase interest rates in order to target inflation.

It predicts that annual Chinese consumer inflation will rise to 3% in the first quarter of 2007, and then to 3.5% in the second. Consumer inflation for the whole of 2006 was just 1.5%.

Currency complaints

On a more positive note, it also expects to see strong growth in Chinese retail sales, which have traditionally lagged way behind China's export earnings.

The value of the yuan has annoyed Western governments

It predicts that first-quarter retail sales will rise by 14% compared with the same period last year.

The report comes a day after separate official Chinese figures showed that the country's trade surplus jumped 67% in January.

This has led to repeated complaints from the US and Europe that China is keeping the yuan artificially low to make its exports as cheap as possible on international markets.

Beijing denies the allegations, although the yuan is currently pegged to a narrow band against the US dollar.

China has pledged to allow the yuan to trade more freely in the future, but says any chance would be gradual, so as not to destabilise its economy.