China's economy is likely to grow by 10.5 per cent this year and slow only slightly next year, a leading government think tank said.

Under the government's macro economic control policies, the country's gross domestic product (GDP) also is expected to maintain or approach a 10 per cent growth rate next year, the Chinese Academy of Social Sciences (CASS) said in a report.

The document is part of the annual "blue book" on China's economic analysis and forecast, which will be published by the end of this year, Xie Yi, a worker for the Social Sciences Academic Press, said yesterday.

The National Bureau of Statistics had estimated the growth in the first half of the year at 10.9 per cent, the highest in recent years.

The CASS report predicted the wealth gap between rural and urban residents would continue to widen.

The per-capita income of farmers is predicated to grow at around 6.1 per cent this year and 6 per cent next year. In the city, the figures are 10.5 per cent this year and 10 per cent next year.

The per-capita income ratio between urban and rural residents was 3.22 to 1 in 2005.

The report also forecast the country's trade surplus would hit a new high of US$158 billion in 2006 and then drop to US$123 billion next year.

Sustained growth in China's trade surplus has led to a rapid increase in the country's foreign reserves, which are widely expected to exceed US$1 trillion this month.

This has, in turn, cranked up pressure for a revaluation of the renminbi. China's biggest trade partner, the United States, has threatened to slam punitive duties on Chinese imports if the yuan is not revalued.

The CASS report said oversupply in some industries has forced producers to seek bigger overseas market shares.

It suggested that China further reform the mechanism used to determine its foreign exchange rate and overhaul its export tariff rebate system to check export growth.

Runaway investment is another major headache for China's policy makers, forcing the government to keep tweaking its policies.

Those policies, including interest rate hikes and the tightening of credit and land supplies, have begun to have an effect.

The report said the growth in fixed asset investment for all of 2006 will be around 24.8 per cent, down from around 30 per cent in the first half of the year. It will further fall to 20.4 per cent in 2007.

"The macroeconomy is basically running well," the report said. "The chances of crossing from 'a bit too fast' to 'overheating' are dwindling."

Control policies must be retained in 2007 to prevent investments from bouncing back, it said.

The report stressed the need to shore up people's incomes, so that economic growth is less dependent on investment and exports and more on consumption.