China's economy expanded by 10.7 percent in 2006, according to the government, reporting growth not seen for over a decade and putting it on track to become the world's third biggest next year.

The outcome in the world's fourth-largest economy topped the 10.4 percent rate in 2005 and was the highest level since 1995, when China grew 10.9 percent, the National Bureau of Statistics told a briefing in Beijing.

"In 2006, the national economy maintained steady and fast growth," said Xie Fuzhan, the bureau's commissioner, emphasising he did not believe there had been an overheating.

The growth rate was also slightly higher than the 10.5 percent that officials had indicated in recent weeks.

China's total economic output came to 20.9 trillion yuan in 2006, or about 2.6 trillion dollars if mid-year exchange rates are used.

This makes it possible that the economic world rankings will soon have to be changed and that China could overtake Germany for the number three spot some time in 2008.

"It could happen if China maintains growth of eight to 10 percent while growth in the Euro area hovers around two percent," Sun Mingchun, a Hong Kong-based economist with Lehman Brothers, told AFP.

For 2007, commissioner Xie warned about "uncertainties in world economic performance and some problems with the domestic economy."

Growth in China in 2006 was fueled mostly by investment and exports, leading to some concerns that the temperature might be too hot in the Asian giant and triggering a series of government measures to cool things down.

"These policies and measures proved to be effective and helped economic development avoid moving from speedy growth to overheating," Xie told reporters at a briefing on the data.

Fixed asset investment, the main indicator of state-funded spending on new productive capacity, rose 24 percent last year, fueled by the ample liquidity available in the Chinese economy.

Industrial output expanded 12.5 percent, boosted by massive investment in new plant and equipment in recent years, and booming exports.

Retail sales, a main gauge of consumer spending and sentiment, increased 13.7 percent in 2006, while consumer price inflation remained moderate at just 1.5 percent.

However, the consumer price index appeared to spike in December, rising 2.8 percent compared with the same month a year earlier.

"For the globe, some will begin to worry that China’s exports will go inflationary," Stephen Green, an economist with Standard Chartered said in a research note.

This would have big implications for institutions such as the US Federal Reserve as they think about inflation in their economies, he argued.

The National Bureau of Statistics confirmed in its briefing Thursday that China's trade surplus reached a record 177.5 billion dollars in 2006, up 74 percent from 2005.

Provided by AFP.