CHINA’s red-hot growth is set to slow in the second half of the year, but its economy should still expand by a heady 10.4 per cent this year, the World Bank forecast yesterday.

In its latest assessment of Chinese economic conditions, the Washington-based bank raised its growth projection for 2006 from its previous estimate of 9.5 per cent.

But as official Chinese data suggested that Beijing’s intensified efforts to cool activity are starting to take effect, the World Bank also played down fears that China’s economy could overheat.

“The outlook for China’s economy remains favourable,” it said. “With production capacity continuing to expand in line with demand, inflation low and the current account in surplus, the main policy concern is not general overheating.”

Instead, the bank’s economists said that Beijing’s big worry was that runaway investment could lead to overcapacity in some sectors and might also spell a build-up of bad loans on the books of some of the country’s commercial banks. “The continued investment boom warrants concerns about efficiency, making more moderate growth desirable,” the bank said.

Earlier, official statistics showed that China’s industrial output had slowed in July. It still grew at a powerful 16.7 per cent annual rate, but this was down from 19.5 per cent in June and was weaker than economists had predicted.

Foreign direct investment in China also slowed markedly last month, falling by 5.5 per cent from a year before to $4.3 billion (£2.27 billion). This left total direct investment from overseas over the first seven months of the year down by 1.2 per cent from the same period in 2005, at $32.7 billion.

The Bank’s assessment came as the authorities in Beijing stepped up their drive to rein in China’s growth, again raising the reserve requirements they impose on commercial banks, after a similar move in June.

Financial markets believe that Beijing is also poised to raise Chinese official interest rates again within weeks. In April, rates were raised by 0.27 percentage points to 5.85 per cent.

Analysts are doubtful that this will have a substantial effect. “This would have next to no impact on the Chinese economy,” Julian Jessop, of Capital Economics, said. “The benchmark rates are largely symbolic, since the restrictions on what most bank’s can charge in practice have gradually been lifted. At most, a second increase in rates within a year would be a signal of Beijing’s determination to control excess investment.”

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