China's inflation heavily outstrips government's target

China has announced that consumer prices surpassed its official target in May while factory output and investment slowed, complicating government efforts to maintain steady economic growth.

New loans issued by Chinese banks also eased in May, suggesting Beijing's moves to prevent the world's third-largest economy overheating were starting to work, but analysts expressed concern about growing inflationary pressures.

The consumer price index, the main gauge of inflation, rose a surprising 3.1 per cent year on year in May, the National Bureau of Statistics said.

The increase outpaced the 2.8 per cent rise in April and overtook Beijing's target of three per cent for the year, potentially increasing pressure on policymakers to hike interest rates.

"We have a foundation for price increases to be controlled at around three per cent this year. The pressure is rather big but the target can still be realised with continued efforts," NBS spokesman Sheng Laiyun told reporters.

Mr Sheng said a low base from last year and higher food and housing costs were to blame, adding that price pressures could ease later in the year.

Stagflation - a damaging combination of slow growth and rising prices - was not a concern as the economy was still "growing at a relatively fast pace", Mr Sheng added.

Producer prices, a gauge of prices at the factory and farm gate, rose a faster-than-expected 7.1 per cent in May and 5.9 per cent over January-May.

Despite rising prices, Beijing will likely delay a move on rates until later this year to gauge the impact of recent policy tightening and Europe's debt crisis, said Brian Jackson, a senior analyst at Royal Bank of Canada in Hong Kong.

"Beijing would like to delay tightening policy until it gets a clearer read of the property market and the fallout from euro-area weakness, but this strategy is risky given the near-term outlook for inflation," he said.

Amid growing signs China's economy was slowing, policymakers would not make a "knee-jerk" response to rising prices, said Bank of America-Merrill Lynch chief economist Lu Ting.

China has kept rates on hold, preferring more targeted measures to curb the property speculation and bank lending that have fanned inflation.

The measures appear to be working. Property prices slowed in May from April while banks issued 639.4 billion yuan ($93.6 billion) in new loans in May, down from the previous month, official data showed.

New yuan lending in May was less than the 774 billion yuan extended in April.

"China's May data confirmed a modest slowing in growth," said Ben Simpfendorfer, a China economist at Royal Bank of Scotland in Hong Kong.

Urban fixed asset investment, a measure of government spending on infrastructure and a key economic driver, rose 25.9 per cent in January-May.

Industrial output from the country's millions of factories and workshops rose 16.5 per cent in May, slower than the 17.8 per cent increase in April, while retail sales accelerated to 18.7 per cent, the NBS said.

Worries that the economy could be hit hard by the European debt crisis eased after data released Thursday showed exports soared 48.5 per cent year-on-year in May on strong foreign demand for Chinese-made products.

While Beijing was expected to keep rates and other tightening measures on hold for now, strong exports meant a revaluation of the yuan was likely in the coming months, said Wang Qing, an economist at Morgan Stanley.