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Last Updated: Thursday, 14 June 2007, 07:35 GMT 08:35 UK
China factory output accelerates
Worker in a light bulb factory
Excessive investment and export growth is driving production
Chinese industrial production sped up in May, surprising analysts who predict further interest rate rises and other measures aimed at cooling the economy.

Factory output surged 18.1%, up from 17.4% in April, China's National Bureau of Statistics said.

The boom in production, fuelled by strong exports and investment, is contributing to the inflationary risks the country now faces, say analysts.

The government said monetary policy needs to be "moderately tightened".

Government warning

In a statement following a meeting of the State Council, China's cabinet, Chinese Premier Wen Jiabao noted the country's economic problems stemmed most notably from rising upward pressure on prices, a spiralling trade surplus, runaway investment and excessive liquidity.

To address these issues, Beijing would "maintain prudent fiscal and monetary policies", adding that monetary policy needed to be "stable but tightened" to prevent the economy from overheating.

The comments came amid a strong set of economic data for May, including a 15.9% growth in retail sales and inflation reaching two-year highs for the month on the back of sharp price rises in pork, eggs and other foods.

Market experts expect the Chinese government to act quickly to cool its steaming economy, with cuts in export tax rebates and measures to encourage imports on the cards, besides the likelihood of an interest rate hike.

Some believe China could also address its exchange rate policy to allow the yuan to rise faster against the dollar.

This could go some way to appease the US where lawmakers are preparing legislation to force China to revalue its currency, which some believe to be 40% weaker than it should be.

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