China finished 2010 with a bang, its growth soaring past forecasts and inflation slowing less than expected, numbers that could prod the government to intensify its easy-does-it approach to tightening.

Evidence of robust growth may give officials confidence to take more aggressive steps to quell price pressures, from stricter lending curbs to interest rate rises, as rising food costs in recent weeks suggest inflation will rebound in coming months.

China's annual gross domestic product growth sped up in the fourth quarter to 9.8 percent from 9.6 percent in the third quarter, the National Bureau of Statistics (NBS) said on Thursday, defying expectations for a slowdown to 9.2 percent.

Inflation pressure is intensifying into January and the tightening pressure will intensify, especially considering the stronger-than-expected fourth-quarter GDP growth, said Isaac Meng, economist with BNP Paribas in Beijing.

Full-year growth picked up to 10.3 percent from 9.2 percent in 2009.

With President Hu Jintao on a state visit to the United States, the figures served as a powerful reminder that despite controversy about China's vast trade surplus, its economy is far from dependent on exports.

Domestic investment and consumption contributed 9.5 percentage points to its growth last year, while net exports added just 0.8 percentage point.

Consumer prices in December rose 4.6 percent from a year earlier, slowing from a 28-month high of 5.1 percent in November but staying above forecasts for a steeper fall to 4.4 percent.

Other important data for December, from factory output to investment, painted a picture of stable expansion, showing that the world's second-largest economy was not overheating despite the surprise jump in growth.

Although the growth and inflation figures had been published in advance by local media, China's main stock index shed 2.9 percent as investors viewed the strong set of data as bolstering the case for tightening.

MORE TIGHTENING NEEDED

China has officially raised banks' required reserves seven times since the start of last year, with its most recent increase taking effect on Thursday.

But it has increased interest rates only twice during that time and some analysts warn that more forceful moves are needed.

The government is still debating the extent of credit curbs, and reports in recent days have pointed to Beijing imposing a lower ceiling on bank lending than some investors had expected.

Beijing still has more work to do to keep the economy on an even keel, said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong. Risks are skewed to more aggressive action.

A Reuters poll showed that economists expect two interest rate rises in the first half of 2011.

To keep banks from skirting restrictions on credit growth, the Chinese banking regulator said on Thursday that lenders must bring all of their off-balance-sheet loans sold to trusts back onto their books this year.

In a sign that the various stabs at tightening are starting to bite, China's benchmark short-term money market rate spiked 194 basis points on Thursday, heading for its biggest single-day rise on record as the latest required reserves increase took effect.

To ease the tight market liquidity, the central bank conducted reverse repurchase agreements with selected banks, sources told Reuters.

INFLATION WORRY

Weekly food price movements had long pointed to a decline in inflationary pressure in December, but many analysts also reckoned that any slowdown in inflation could be temporary.

December's data showed a clear slackening in price pressures as monthly inflation eased to 0.5 percent from 1.1 percent in November.

A drop in food price inflation to an annual rate of 9.6 percent in December from 11.7 percent in November was the main reason for the decline.

But price pressures could pick up in January, because harsh winter weather could compound a surge in demand with the Lunar New Year holiday falling earlier in the calendar this year than in 2010.

Indeed, food price data compiled by the commerce ministry shows vegetables and meat have become more expensive since the start of the year.

Growth momentum remains strong. However, inflation is the key focus of the market. It will be a challenging year for China to battle inflation, said Dongming Xie, China economist at OCBC Bank in Singapore.

Currency appreciation is another potential tool in Beijing's tightening kit.

It has nudged the yuan higher against the dollar over the past week, but dealers see the mini-burst of appreciation as politically motivated to try to soften U.S. criticism of China's currency policy during Hu's state visit.

Analysts expect appreciation of just 5 percent this year, with Hu himself saying that inflation was hardly the most important factor in determining the exchange rate.

Ma Jiantang, chief of China's statistics agency, said he was confident that China would be able to control inflation in 2011 and that steps to limit the amount of cash in the economy would be instrumental to taming price pressures.

Economists polled by Reuters forecast that Chinese consumer price inflation will average 4.3 percent this year, above the government's target of capping it at 4 percent.

Economic growth is expected to slow to 9.3 percent in 2011 from 10.3 percent last year.

China BNP Paribas