Premier Wen Jiabao has warned that the country faces tough challenges in balancing economic growth and tightening policies.

China must avoid piling on adjustment policies, which carry risks of "negative consequences", amid complex domestic and international conditions, Wen said on Saturday during his trip to the northern port city of Tianjin.

"At present, the national economy continues to improve, but domestic and external conditions remain extremely complex, and macro adjustment faces many dilemmas," he said.

Analysts said his remarks show the tough choices policymakers are facing as rising inflation and signs of slowing economic growth are intertwined complicating the situation.

China's gross domestic product expanded by 8.7 percent in 2009 as the country weathered the global financial crisis and its economic growth accelerated to 11.9 percent year-on-year in the first quarter of this year.

Consumer inflation, however, has registered steady growth, reaching 2.8 percent in April - the highest in 18 months - while housing prices have continued to soar.

The government has taken initiatives to curb the inflation, and anecdotal evidence suggests housing prices are headed downward.

Economists have also said inflation could start to ease from the third quarter of this year.

"Policymakers will have to walk a fine line to balance strong growth with stable inflation, and they are likely to do this with further administrative measures rather than tougher measures such as increasing interest rates," said Alaistair Chan, associate economist in the Sydney office of Moody's Economy.com.

As a sign of slowing economic activities, growth of sectors such as steel, cement and electricity is likely to slow in line with fixed investment growth as infrastructure projects like railway lines near completion, Chan said.

"Steps to cool bank lending may also be slowing the rate of new projects."

On the real estate front, the biggest question now is whether the latest property tightening measures will lead to a crash in overall construction and economic growth, said Wang Tao, head of UBS Securities' China Economic Research.

"The answer depends on whether one believes a big nationwide property bubble has built up in China, and what the policies aim to achieve and how they may evolve."

So far, "it is not clear whether the reported drop in housing prices is an early sign of a downturn in the property market", said Chan.

External uncertainties also weigh on policymakers as they may affect China's exports, still a pillar of the overall economy despite the country's effort to make domestic demand the top driving force for growth.

"The European (sovereign debt) problem is not over yet," said Huo Jianguo, director of the Chinese Academy of International Trade and Economic Cooperation affiliated to the Ministry of Commerce.

"China's export could be put to a difficult test in this round of (global) economic adjustment," he told a forum held by the China Society of World Economics and University of International Business and Trade on Sunday.

China will continue flexible policies to steer the economy toward stable growth. "We will adhere to an active fiscal policy and an appropriately loose monetary policy, and properly handle the direction, intensity and pace of macro regulation, maintaining balanced and relatively fast economic development," he said.

(China Daily May 17, 2010)