Economic data for May released Friday showed that China was eyeing rising inflation and slowing economic growth, indicative of what the "the most complicated year" meant for the country's economy.

Experts said the mixed bag of economic data would make it difficult for China's policymakers in the coming months.

China's consumer price index (CPI), a main gauge of inflation, rose in May to 3.1 percent, the highest since November 2008, according to figures released by the National Bureau of Statistics (NBS) Friday.

The NBS also reported that growth of industrial value-added output slowed to 16.5 percent in May from 17.8 percent in April.

Urban fixed assets investment for the first five months rose 25.9 percent year on year, 0.2 percentage points down from the first four months.

Inflation quickens

The 3.1 percent CPI growth was up 0.3 percentage points from April's rise of 2.8 percent. In the first five months, China's CPI rose 2.5 percent year on year.

The May figure exceeded the government's year-average target of 3 percent set in March.

The producer price index (PPI), a major measure of inflation at the wholesale level, rose 7.1 percent year on year in May, up 0.3 percentage points from April's 6.8 percent.

In May, the CPI in China's urban areas increased 2.9 percent and in rural regions by 3.3 percent. Food prices, which accounted for about a third of the weighting in calculating the CPI, rose 6.1 percent.

China's inflation has stood above 2.25 percent, the one-year deposit interest rate set by the government, for four consecutive months, which ignited growing expectations of interests rate hikes.

NBS spokesman Sheng Laiyun said the higher inflation was because of a low comparison basis from the same period last year and was pushed up by food prices hikes.

However, he said the inflationary pressure was easing and China had the basics for keeping prices under control this year.

Declining commodities prices amid the European sovereign debt crisis would reduce the inflationary pressures, he said.

"Although China faces quite a lot of pressure, the 3-percent target is still possible," he said.

Lu Ting, China economist of the Bank of America-Merrill Lynch, said in an e-mailed note that China's rising inflation could be interpreted negatively by markets, and would be a risk for a few more months.

"We don't expect a knee-jerk reaction from policymakers: interest rates won't be hiked until the fourth quarter this year," he said.

Xiong Peng, researcher at the Shanghai-based Bank of Communications, China's fifth largest lender, said that China's CPI was expected to peak in June or July, and average at 3 to 4 percent for the whole year.

The government was likely to postpone raising interest rates to the third quarter, he added.

The People's Bank of China, or the central bank, said new yuan-dominated loans in May fell to 639.4 billion yuan ($93.6 billion) from 774 billion yuan in April.

Slower economic growth?

Growth of factory production and fixed-asset investment contracted, illustrated by slower growth of auto sales and a cooldown in the property market, government data showed.

Chinese auto sales in May rose 28.35 percent from a year earlier, but the figure was down 7.5 percentage points from April. The property market saw slower growth in property prices at 12.4 percent in May from April's 12.8 percent, and a decrease of floor space sold due to government tightening measures.

Moody's Analytics said in a note that reduced bank lending was crimping business investment, while infrastructure investment was starting to ease as government projects were completed.

"With this trend in place and Chinese authorities actively working to cool growth amid emerging inflation pressures, fixed investment is expected to play a smaller part as a driver of economic activity later this year," according to the note.

It also said slower industrial output growth was in response to gradual tightening measures, adding "this is not necessarily a bad thing. The apparent moderation in industrial production growth will help to contain these inflationary pressures."

The gradual and orderly deceleration to date provides hope that Chinese policymakers would be able to engineer a soft landing and prevent the economy from imploding, it said.

China's domestic demand remained robust, as retail sales, another major driver of the country's economy, quickened its growth to 18.7 percent in May from 18.5 percent in April.

Experts attributed the growth to a series of incentives, including subsidies and tax breaks for home appliances and cars.

Exports also staged a strong growth in May surging 48.5 percent from a year ago in May, faster than the 30.5 percent growth in April.

Policy outlook

China was facing the "most complicated" economic conditions this year and the government would be "very cautious and flexible" in choosing when to withdraw the stimulus policies, Chinese Premier Wen Jiabao said in March.

The country's gross domestic product (GDP) expanded 11.9 percent year on year in the first quarter of this year after a growth of 8.7 percent in 2009.

The World Bank forecast GDP growth at 9.5 percent for this year, according to its report published on June 9.

Zhu Baoliang, chief economist of the State Information Center, said currently the economy was facing "a rather complicated situation and huge uncertainties," so the stimulus policies needed to be retained.

The government has reiterated to continue its proactive fiscal policy and moderately loose monetary policy, and vowed to make proper adjustments according to changes in economic conditions.

The central bank said earlier this month that the foundation of China's economic recovery was not solid and warned that the expanding European sovereign debt crisis and international trade frictions were some of the risks that might have a significant impact on China's economy

The soft landing of China's economy was particularly important in light of recent international events, including the sovereign debt crisis in Europe and relatively weak labor market in the US, the Moody's Analytics said.

"The global economy will continue to rely on China as it was major growth driver for some time to come," it said.