China's economy is forecast to grow at a slower annual rate of 10.4 percent in 2008 because of a deteriorating external environment and domestic tightening policy, a research report said.

The gross domestic product (GDP) in the world's fastest-growing major economy expanded 11.9 percent last year, the fifth year of double-digit growth.

The economy had now started shifting to a slowdown from a record growth pace, said a report by Renmin University of China (RUC) and Donghai Securities.

The GDP grew 10.6 percent in the first quarter, down 1.1 percentage points from the same period last year. This was on weakening external demands for Chinese exports and the worst winter storms in more than five decades.

"This is not a short-term, temporary correction," the China Securities Journal reported Monday, quoting Liu Yuanchun, RUC's School of Economics vice president.

"China's economy has a good chance of repeating earlier slowdowns that feature softening in the short term but accelerating weakening in the middle term."

The report suggested the government increase fiscal spending and use more reserve requirement increases and bill sales rather than harsher interest rate hikes in the second half to boost the economy while taming inflation.

"The tight monetary policy, which had better not to be continued for long, can only help to adjust people's expectations on inflation," the report stated. "Don't expect it to play a direct role in curbing prices."

It also advised the government order temporary controls on grain exports and increase government subsidies for agricultural production.

The surging food prices are considered the major driver behind China's inflation as food accounts for one-third of the main inflation gauge, the consumer price index (CPI).

The CPI eased to 7.7 percent in May as food prices started to fall after surging in the past year. The reading was 8.5 percent in April, up from 8.3 in March and down from the 12-year high of 8.7 percent in February.

The report added the CPI might rise 7.1 percent, well above the government target of 4.8 percent, and the trade surplus to fall by 3.4 billion U.S. dollars for all of 2008.

The surplus dropped to 20.2 billion U.S. dollars in May, down 10 percent from a year ago. Last year, it surged 47.7 percent to a record 262.2 billion U.S. dollars.

Editor: Yan