(Reuters) – China’s economy grew about 11.9 percent in the first quarter from a year earlier, topping expectations and the fastest annual pace in nearly three years, according to two market sources.

China

Consumer price inflation in March was roughly 2.4 percent year-on-year, below forecasts and a deceleration from February’s 2.7 percent rate, one of the sources said.

China is scheduled to publish its first-quarter GDP growth rate and a suite of economic data for March on Thursday.

Despite the economy’s rapid growth — an annual rate of 11.9 percent would be the fastest since the second quarter of 2007 — the government on Wednesday struck a note of caution.

“The economy’s fast-paced growth is the result of policy stimulus to a relatively big degree and it is also because of the low base effect compared with last year,” the State Council, or cabinet, said in its quarterly assessment of the economy.

But, in a sign of its gradual shift toward policy tightening, the government omitted a stock phrase used in its assessments last year that the economic recovery was not yet on a solid footing.

Instead, it said that the economy faced a range of problems and took direct aim at the property sector.

PROPERTY WORRIES

“Some factors that are pushing up prices have appeared, strengthening inflationary expectations. In particular, the overly fast increase of housing prices in some cities is quite a prominent problem,” the cabinet statement said.

“We will unswervingly curb excessively fast housing price increases,” it said, adding that it would also work to stabilize the overall prices level.

Qu Hongbin, chief China economist at HSBC, said the stronger-than-expected GDP growth pointed to a build-up of broad-based price pressures, even if inflation fell in March.

“This calls for more decisive steps toward policy tightening over the coming months,” he said.

Higher bank reserve requirements, interest rate increases, a stronger exchange rate and restrictions on infrastructure spending could all form part of the policy menu, Qu added.

Property inflation quickened to 11.7 percent in the year to March from February’s 10.7 percent reading, according to the government’s official gauge, which likely understates the extent of price rises.

The cabinet pledged to maintain the appropriately loose monetary policy and active fiscal policy first implemented at the height of the global financial crisis in late 2008.

Although the official description of policy has not been changed, Beijing has, in practice, reined in its ultra-loose, pro-growth measures.

In its clearest move to normalize policy, it has guided the country’s banks to lend less. Banks issued 2.6 trillion yuan ($381 billion) in net new local-currency loans in the first quarter, 40 percent less than in the same period last year.

The focus of the appropriately loose monetary policy has shifted to “appropriately” from “loose,” Hu Xiaolian, a central bank vice governor, said last month.

FINANCIAL RISKS

The cabinet also noted that potential financial risks should not be overlooked, vowing to strengthen its management over local government financing.

Economists have pointed to debt incurred by local governments as a growing risk to Chinese public finances. Estimates of the amount of their debt vary, with most centering around 6 trillion yuan, roughly 20 percent of GDP.

Provinces, cities and towns have circumvented restrictions on their own borrowing by obtaining financing through investment subsidiaries, making it difficult to gauge the full extent of local government debt.

The cabinet statement did not make any mention of the yuan or exchange rate policy.

U.S. President Barack Obama said on Tuesday that China had yet to set a timetable for reforming the yuan despite “frank” conversations he had had with President Hu Jintao, and a Chinese spokesman said Beijing would not bow to foreign pressure on currency reform.

The GDP and inflation numbers heard by Reuters matched those reported earlier on Wednesday by China Business News, a Chinese-language newspaper which cited an unidentified source.

($1=6.825 Yuan)

(Reporting by Beijing News Room; editing by Stephen Nisbet)