The economy is likely to expand 9.8 percent in 2007, down from the 10.5-percent forecast by the central bank, said a report by the central bank's research unit posted on the state-run China Securities Journal.

The Consumer Price Index, an indicator of inflation, may climb two percent in the coming 12 months fueled by rising costs of food, which accounts for about one-third of the total index. The figure is higher than the central government's forecast of 1.4 percent for the whole of this year.

"A milder expansion in money supply will help ease inflation pressures on the economy," said Tang Xu, head of the research unit and the report's lead author.

"The combination of interest hike and higher reserve requirement ratios this year have proved itself to be effective in stabilizing prices."

Meanwhile, gains in producer prices would continue to moderate in 2007 as China soaks up overcapacity due to several years of an investment boom. Factory-gate inflation, however, is still feeling upward pressure as land costs increase in the coming year.

The trade surplus will start to narrow in the second half of next year as China works to optimize its export mix.

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