July 18 (Bloomberg) -- China's economy grew 11.3 percent in the second quarter, the fastest pace in more than a decade, and the government said it will clamp down on lending and investment.

Spending on factories and real estate accelerated in June, the statistics bureau said today, helping gross domestic product grow faster than the 10.4 percent median forecast among 30 economists surveyed by Bloomberg News. It was the biggest expansion since 1994, when the economy was a quarter the size.

The figures added to speculation the central bank will raise lending rates for a second time this year and order banks to rein in credit in the world's fastest-growing major economy. China may also allow faster currency gains to curb a trade surplus that's flooded the economy with cash and strained relations with the U.S.

``We are concerned about the overheating situation,'' said Masahiro Kawai, head of the Asian Development Bank's office of regional economic integration. ``There is an even stronger case for a tighter monetary policy and a more accelerated pace of the yuan's appreciation.''

China's economy has grown 10-fold since Deng Xiaoping began free-market reforms in 1978, overtaking the U.K. as the world's fourth-biggest in 2005. The nation had 320,000 U.S. dollar millionaires at the end of last year, according to Cap Gemini SA, and Shanghai's benchmark stock index is up 44 percent this year.

The expansion has been marred by bouts of overheating that forced the government to respond with lending crackdowns at least four times since 1990.

Fixed-asset investment in China's towns and cities jumped 31.3 percent in the first half from a year earlier, accelerating from 30.3 percent in the first five months. Industrial production rose 19.5 percent in June.

`Not Sustainable'

Consumer prices rose 1.5 percent in June, the fastest pace since January.

Spending on factories may create overcapacity, driving prices and corporate profits lower and adding to bad loans at China's lenders, the World Bank said in April. Any slump would rock global commodity prices because China is the biggest consumer of steel and the second-largest oil user.

``An economic model that's based on excessive fixed-asset investments and exports is not sustainable,'' Zheng Jingping, a bureau spokesman, told a press briefing in Beijing today. ``The government will be on guard for inflationary pressures.''

After issuing today's report, the government doused speculation that it would revalue the yuan, a year after ending its peg to the U.S. dollar. The currency declined 0.06 percent to 8.0017 per dollar as of 3:30 p.m. in Shanghai, falling for a third day. Zheng said there would be no ``surprises on currency adjustments.''

Interest Rates

China has let the yuan strengthen 1.3 percent against the dollar in the past year. The gain failed to reduce the trade surplus, which totaled $113 billion in the 11 months since China changed its currency regime.

``We don't believe investors positioning for a sharp revaluation will be rewarded,'' said David Mann, a Hong Kong- based foreign-exchange strategist at Standard Chartered Bank Plc. ``Any expectation of more than 3 to 4 percent per year is likely to be disappointed.''

The yield on the 2.8 percent government bond due in March 2016 held close to a three-month high at 3.19 percent, amid speculation the central bank will raise rates.

Inflation Risk

``Inflation is likely to surprise on the upside,'' said Liang Hong, an economist at Goldman Sachs Group Inc. in Hong Kong. ``If consumer prices start to show much more momentum, the government's tightening doses will be stronger.''

People's Bank of China Governor Zhou Xiaochuan on April 28 raised the benchmark one-year lending rate to 5.85 percent, and on June 16 ordered commercial banks to set aside more money as reserves.

China will strengthen controls to address ``prominent problems'' such as overinvestment, Zheng said. Policy makers still need to assess the impact of recent measures, he said.

Money supply rose 18.4 percent last month, the smallest increase in six months, the central bank said July 14.

Shares in companies that benefit from faster growth gained. China Life Insurance Co., the nation's biggest insurer, rose 1.2 percent to HK$12.25. The company said premium income rose 22 percent in the first half to 111.4 billion yuan ($13.9 billion). Hong Kong's Hang Seng Index closed down 0.1 percent at 16,043.94.

`Touch the Brakes'

``Growth is becoming scarce, what China has is growth,'' said Geoff Lewis, head of investment services at JF Asset Management Ltd. in Hong Kong, which holds about $81 billion of Asian assets. While authorities may ``touch the brakes a little bit harder in the second half,'' they will probably still target growth of around 9 percent, he said.

Growth accelerated from 10.3 percent in the first quarter. The World Bank forecasts 3.7 percent global growth for this year. China hasn't revised quarterly growth figures for before 2005 to reflect a nationwide economic census that added $285 billion to 2004 gross domestic product.

Further rate increases would add to costs of manufacturers, who are already struggling to pass on higher commodity prices. Standard & Poor's last month said a 25 percent rise in the yuan and a 2 percentage-point increase in interest rates would cause company profits to drop by a third.

``We don't expect an accelerated pace of yuan appreciation,'' said Tim Condon, an economist at ING Groep NV in Singapore. ``The government fears it would squeeze already thin profit margins in manufacturing industries, with adverse employment consequences.''

Job Creation

China relies on exports to create jobs for workers leaving rural areas for cities. Consumer confidence fell to a three-year low in the second quarter on concern over job security, according to a survey published by MasterCard yesterday.

China's currency policy has limited the central bank's ability to use interest rates to cool the economy. In 1990, China posted its slowest economic growth on record -- 3.8 percent -- as then-Premier Li Peng curbed investment.

Three years later, rebounding growth and soaring inflation prompted lending restraints that slowed growth to 10.9 percent in 1995 from 14 percent in 1993.

China clamped down again in 2004, restricting lending to industries including steel, autos and real estate. The curbs were loosened last year, triggering a rebound in investment.

To contact the reporter on this story: Nipa Piboontanasawat in Beijing, or through the Tokyo newsroom at npiboontanas@bloomberg.net

Last Updated: July 18, 2006 06:52 EDT