EVERYONE WANTS AN AUTO: Auto sales across the nation continue on an upward growth pattern this year due to government subsidies and a bullish real economy (ZHANG WENKUI)

"In general, domestic consumption will maintain a stable and relatively fast growth," said the SIC report.

Inflation surfaces

One major problem haunting the Chinese economy for the first three quarters this year was consumer price trends. In July, the consumer price index (CPI) grew more than 3 percent year on year, breaking the 3 percent threshold set by the Chinese Government at the beginning of this year. The index moved further up by 3.5 percent year on year in August, followed by a 3.6 percent rise in September, according to NBS figures.

The CPI was largely driven by soaring food and vegetable prices, said Yuan Gangming, a senior researcher at the Tsinghua University's Center for China in the World Economy.

Data from the National Development and Reform Commission showed that retail prices of grain in 36 large and medium-sized cities experienced modest growth in September, with prices of pork, eggs, beef, chicken and edible oil on the rise.

After peak prices in the July-September period, consumer prices are bound to head south in the fourth quarter, said Zhang Yongjun, a researcher at the China Center for International Economic Exchanges. But the pace of decline might not be as quick as expected, he said.

Meanwhile, excessive liquidity is also adding to inflationary pressures. Newly added loans denominated in renminbi stood at a dizzying 6.3 trillion yuan ($944.5 billion) in the first three quarters, and the amount for September was 595.5 billion yuan ($89.3 billion), said the central bank.

In wake of concerns, the central bank on October 19 announced plans to raise the benchmark one-year lending and deposit rate by 0.25 percentage points, the first time it did so since December 2007.

Foreign trade totaled $2.15 trillion from January to September, growing 37.9 percent from one year ago. Of this, exports skyrocketed 34 percent year on year to $1.13 trillion, compared with 35.2 percent for the first half of this year.

But less reliance on exports may be good news for the Chinese economy. Slack is building up on the trade front as the world economy loses steam, said a report by the SIC.

And after the breakout of the European debt crisis, many countries started to cut back on their fiscal expenditures. In addition, trade protectionism is rearing its ugly head in the Western world, casting an ominous shadow over the prospects of Chinese exports, said the report.

Domestic policies have also weighed on Chinese exporters' competitiveness. The Ministry of Finance and the State Administration of Taxation ordered a cancellation of export rates for a total of 406 items, including steel, non-ferrous metal and pharmaceutical products, effective last July. Prior to this, those products enjoyed rebate rates ranging from 5-17 percent.

China's fiscal revenues amounted to 6.3 trillion yuan ($945.1 billion) in this year's first three quarters, representing an increase of 22.4 percent year on year. Of this total, tax revenues grew 24.2 percent year on year to 5.6 trillion yuan ($838.9 billion), and non-tax revenues went up 9.6 percent to 708.21 billion yuan ($106.2 billion).

Fiscal sustainability

Fiscal expenditures of the country added up to 5.45 trillion yuan ($817.2 billion), growing 20.6 percent from a year earlier.

The fiscal surplus stood at 853.46 billion yuan ($128 billion) for the January-to-September period, signaling that a debt crisis is almost impossible for China. It also adds luster to the country's growth outlook since the government is in a healthy fiscal position to stimulate the economy.

There are several reasons for the jump in fiscal revenues so far this year. First, the real economy has significantly gained strength, delivering a solid boost to tariffs, business taxes and vehicle purchase taxes. Second, the product prices have been on the rise this year, driving up the total amount of tax revenues. Third, the fiscal revenues grew a modest 5.4 percent in the first quarters of 2009, providing a relatively low comparison base for this year.

The fiscal revenue grew 22.4 percent in the third quarter, compared with 34 percent in the first quarter and 22.7 percent in the second quarter. At a stage of rapid urbanization, China will experience a surge on expenditures on energy conservation and emission reduction, employment, and social security—and this can be expected to mount pressure on the country's fiscal sustainability.