China should set up a system that will tie people's income with the rise in the consumer price index, the State Information Center suggests in a report published yesterday.

The research unit under the National Development and Reform Commission also said that China should improve its innovative ability and reduce energy consumption to combat risks of a sudden slowdown in economic development. It also said that other measures to control more investments should also be considered.

"It is a challenge for China to contain growing inflation next year due to rising prices of foodstuff and farm produce in the global market. It should set up a system to connect people's income and consumer prices to ease the pressure over people's livelihood," the report said.

In November, China's consumer price index, the main gauge of inflation, climbed to an 11-year-high of 6.9 percent, pushing the cumulative rise in the first 11 months to 4.6 percent, up 3.3 percentage points from the same period last year.

The forecast for next year's consumer prices was divided, with the central bank's research bureau projecting 4.5 percent while Deutsche Bank predicted a 3.8-percent growth.

But both institutions forecast a retreat from this year's surge following the imposition of tighter credit control policies.

"The economy will observe another year of accelerated growth but the pace will slow due to the government's strong determination to cool economic development," said the report.

"Also, China's property market and stock market have seen risks accumulated from rapid advances (in prices). They might experience a relatively heavy correction next year, which poses a big challenge to the nation's macroeconomic control."

The subprime turmoil in the United States may spread from the finance sector to the wider economy at large, the report said. It might lead to a cut in China's exports and leave domestic factories idle.

To cope with the challenges, China should boost innovation and cut energy use to sustain economic development.

(Shanghai Daily December 29, 2007)