China needs to slow economic growth to below 10 per cent to avoid overheating and contain inflation, a cabinet researcher said.

'China's economic growth may slow later this year, which is necessary to avoid overheating,' Deputy Director of the State Council's Development and Research Center, Liu Shijin, said at a financial forum in Beijing on Saturday. 'While the government takes steps to damp asset prices, we should also closely monitor inflation after record bank lending last year,' Liu said.

Bloomberg News reports that China's statistics bureau may next week report an acceleration in producer price gains and consumer inflation, underscoring a risk of overheating even after Premier Wen Jiabao unleashed what economists called 'draconian' measures to crack down on property speculation and raised banks' reserve requirements for a third time this year to rein in liquidity.

Wen's campaign to cool real estate prices may damp expansion of the world's third-largest economy as the Greek debt crisis threatens to undermine export demand, exacerbating any slowdown. Concerns that the European contagion may spread led Asian stocks to tumble on Friday after United States equities plunged the most in a year the previous day.

China now faces an 'even more complex' environment as the debt crisis adds uncertainty to the global recovery and excessive liquidity in China pushes up asset prices, Liu said.

'Where is the ultra-loose monetary policy going? That is like the other shoe that has yet to drop,' said Liu, whose agency advises China's top policy makers.

China's 11.9 per cent economic growth in the first quarter revealed signs of overheating in the economy, the researcher said.

Policy makers would face difficulties keeping full-year inflation at three per cent, he said, adding that rapid growth of money supply in 2009 might fan producer and consumer price-rises this year.

If the target is missed, the government must contain consumer-price gains below five per cent, Liu said.

In preventing asset bubbles and inflation, the government should also avoid reducing growth so much that it leads to stagflation, Liu said.

The government is targeting eight per cent economic expansion this year, which is deemed necessary to create jobs and maintain social stability.

Even if growth slows, it is likely to be between nine per cent and 10 per cent for the whole of 2010, according to Liu.