China’s economy grows 10.7%, fastest in a decade

China reported Thursday that its sizzling economy grew at the fastest rate in a decade last year as the government struggled to contain the strains of an export-driven boom.

The economy grew 10.7%, moving China closer to overtaking Germany as the world’s third-largest economy, figures issued by the government show. It was the fastest growth since 1995, when the economy expanded 10.9%.

Spending on real estate and other assets soared despite government efforts to cool an investment boom that it worries could ignite inflation or a debt crisis. Consumer spending grew more slowly, suggesting that Beijing still faces challenges in its effort to reduce reliance on exports and narrow its trade gap by boosting domestic consumption.

“Fast growth in itself is fine. It’s more about the composition of growth,” said economist Mingchun Sun of Lehman Bros. “Investment needs to slow even faster. Second, there is an urgent need to reduce the trade surplus.”

Many analysts expect Beijing to raise interest rates again this year, after two hikes last year.

The government has imposed investment curbs on real estate, auto manufacturing and other industries and tried to restrain exports by levying new taxes on steel and other products.

Beijing has allowed the gradual rise of its currency to quicken in recent weeks, which could slow the growth of the trade surplus by making Chinese goods more expensive abroad.

But the government says its efforts only began to take effect in late 2006.

“Outstanding problems still exist with the irrational relationship between investment and consumption, the imbalance of payments and excess liquidity in the banking system,” said the commissioner of the National Bureau of Statistics, Xie Fuzhan.

In efforts to boost consumer spending, he said, “we are still not seeing significant results.”

China’s total economic output last year was 20.9 trillion yuan, the government said, or $2.7 trillion at current exchange rates. Germany’s output was $3 trillion, but its 2.5% growth rate was far below China’s.

The government said this month that its swollen global trade surplus jumped nearly 75% in 2006 to a record $177.5 billion -- equal to a large chunk of China’s total output.

The flood of export revenue is straining Beijing’s ability to keep inflation in check. The central bank is draining billions of dollars from the economy each month and has piled up the world’s biggest store of foreign reserves, just over $1 trillion at the end of December.

Incomes of urban households grew 10.4% in real terms last year, while those in the countryside rose 7.4%, according to the statistics bureau. Rural incomes were “still at a comparatively low level,” though compared with China’s historical poverty, Xie said, “this is a great leap forward.”