By Chen Jia

The lowering production prices was in line with the unexciting growth of industrial output in May, a slight increase to 9.6 per cent from 9.3 per cent in April, the second month of single-digital growth after the country show at least 10 per cent expansion for about three years, according to the NBS.

In the first five months this year, fixed-asset investment, which is seen as the strongest force to drive the country's economic growth, increased 20.1 per cent compared with the same period last year. The growth pace was 0.1 percentage points lower than that for the first four months, the NBS said.

Qu said he expected more cuts of the reserve requirement ratio for commercial banks in the second half to hedge the rapidly decreasing yuan position for foreign-exchange purchases thanks to weakened overseas demand.

"Another four cuts [totalling] 200 basis points in the next six months may be necessary."

Economists on Saturday said they expect more loosening economic policies to prevent an uncontrollable contraction in the next a few months after the People's Bank of China said it would reduce interest rates on Thursday.

The central bank lowered the one-year benchmark interest rates by 25 basis points, the first decrease since the end of 2008, signaling that a cycle of easing monetary policy may start.

Li Daxiao, head of research at the Shenzhen-based Yingda Securities Co Ltd, said that people should not worry about a deflation risk in China, as additional fine-tuning policies can be expected to take effect in the second half.

"The share market also has an optimistic outlook based on the likely economic rebound," he added.

Instead of the current domestic situation, the most dangerous risks for the world's second largest economy are coming from the outside, David Lipton, first deputy managing director with the International Monetary Fund said on Friday in Beijing.

Uncertainties in the face of a deepening European crisis could limit exports from China in the near term, according to Lipton.

"We agree that it was critical not to lose sight of the top medium-term priority of transforming China's economy to a more consumer demand-based growth model," which is expected to boost living standards and contribute significantly to strong and balanced global growth, he said.

In May, the total volume of the social retail sales was 1.67 trillion yuan (S$332 billion), with a nominal growth rate of 13.8 per cent from a year earlier, slipping from 14.1 per cent in April and 15.2 per cent in March, based on the data showed by the NBS.

"The reform process should go faster to avoid a further build-up of risks, and produce a smooth and controlled adjustment to consumer-based growth," Lipton said.