A year after suffering one of its worst declines in decades, China's economy has rebounded strongly, recording 8.7 per cent growth in 2009.

The Chinese government's official growth figures for last year, released on Thursday, have exceeded earlier forecasts: the economy registered an unexpectedly high 10.7 per cent growth between October and December, largely on the back of record government spending on infrastructure projects.

China is now on course to overtake Japan as the world's second-largest economy, though confirmation of that development will have to wait until next month, when Japan's official GDP figures are released.

But Thursday's data, released by the National Bureau of Statistics (NBS), also reaffirmed what economists say are the country's two most pressing challenges: a widening gap between urban and rural areas, and a continued dependence on growth that is either government-driven or export-led.

Stimulus plan

Economists here have largely attributed last year's recovery to the government's $586-billion stimulus plan, which went into force in November 2008. Urban fixed asset investment rose to 30.5 per cent last year to $2.8 trillion. In the past 12 months, the government has also unveiled measures to increase domestic spending, including subsidies for consumer goods, tax cuts in rural areas and an overall loosening of monetary policy.

The 10.7 per cent growth for the last quarter of 2009 was a marked improvement from the 6.2 per cent seen in the first, when the export-driven economy suffered in the wake of collapsing demand from the West. But the last year has seen a steady recovery, with 7.9 per cent year-on-year growth in the second quarter and 9.1 per cent in the third.

The big challenge China faces now, economists say, is sustaining this recovery once the boost given by stimulus spending subsides. There are also concerns of bubbles in asset markets as a result of the loosening of monetary policy and subsequent record lending, which doubled in the past year to $1.45 trillion.

Signs of bubbles

"We can already see some signs of bubbles and signs of tensions in the Chinese economy, in particular in the housing sector," said Andrew Burns, an economist at the World Bank, this week while releasing the banks forecasts for 2010, which has estimated 9 per cent growth for the country next year.

Ma Jiantang, director of the NBS, said the government was likely to focus more on balanced growth in the year ahead. "A key point of macro-regulation this year would be to balance the tasks of ensuring stable and relatively fast economic growth, adjusting economic structure and regulating inflation prospects," he said.

China has now met its annual 8 per cent growth, a target set by the former Premier Zhu Rongji in 1998, and regarded by the government as the minimum level of growth the country needs to maintain to ensure social stability.

But Thursday's numbers also pointed to widening disparities between urban and rural areas, a long-standing concern for the government. The per capita income of an urban resident in China has now risen to 3.31 times that of a rural one - the widest gap in the People's Republic's 60-year history. In 1978, when economic reforms and the "opening up" policies were first initiated, the ratio stood at 2.56 to one.

Mr. Ma said the government would look to "moderately raise" agricultural produce prices to address the gap in the coming year.

The government is also considering a reform of social welfare policies to boost incomes in rural areas.

More In: International | News