The economy grew by a blistering 11.5 percent in the third quarter, although slightly down from 11.9 percent in the second, raising the possibility of more interest rate rises and other curbs to prevent overheating.

The growth was driven mainly by a double-digit surge in investment in factories and other fixed assets, the National Bureau of Statistics (NBS) said yesterday.

As the economy continues to steam ahead, China is expected to replace Germany this year to become the third largest in GDP terms, behind the United States and Japan, Zhang Ji, a senior official from the Ministry of Commerce, said yesterday.

Fears of an interest rate hike and other tightening policies sent stocks plunging to the biggest one-day drop in nearly five months.

The benchmark Shanghai Composite Index dropped 4.8 percent to 5562.39. The smaller Shenzhen Composite Index fell 5.4 percent to 1374.12.

The annualized consumer price index (CPI), as expected, grew by 6.2 percent in September and 4.1 percent in the first nine months, NBS spokesman Li Xiaochao told a press briefing.

Fixed-asset investment increased by 25.7 percent in the first three quarters, 1.6 percentage points down year on year and 0.2 percentage point lower than in the first half of this year.

Retail sales increased 15.9 percent year on year in the January-September period, 1.4 percentage points higher than last year. They were partly driven by rising income in both rural and urban areas, Li said.

During the first three quarters, urban residents saw disposable income increase by 13.2 percent year on year after factoring in inflation, while farmers earned 14.8 percent more.

Li said the figures indicate that macroeconomic regulatory measures - centered on reining in prices, investment and exports and boosting domestic demand - in previous months were taking hold.

"We have turned the economy from overheating to speedy growth," Li said.

Analysts, based on the trends, expect a soft-landing for the economy.

Wang Qing, chief economist of Morgan Stanley Asia in Hong Kong, said the GDP may grow by 11.3 percent in 2007, 10 percent in 2008 and 9.5 percent in 2009. Wang forecasts the CPI growth to reach 4.3 percent this year and 3.5 percent next year.

NBS' Li admitted that there are "outstanding systematic and structural contradictions" in the economy, pointing out that economic growth and prices remain high.

Premier Wen Jiabao vowed on Wednesday at a State Council executive meeting to continue to rein in fixed-assets investment growth, curb lending and tame price rises.

Li said the price pressure may ease in the fourth quarter; and that the authorities will closely watch developments to decide whether to announce new tightening measures.

Economists expect another interest rate hike, at least in the remaining months. It could come as soon as within a week, as the State Council meeting has sent a strong message, they said.

(China Daily 10/26/2007 page1)