China's gross domestic product will grow about 8.5 per cent in the third quarter from a year earlier, picking up from the second quarter's 7.9 per cent pace, a government think-tank has said.

The bullish forecast comes against a background of anxiety in world markets that Chinese growth might falter as a boom in fiscal spending and bank lending peters out.

The State Information Centre (SIC) said growth in bank credit would "normalise" in coming months but warned that any abrupt slowdown in lending would leave many state-backed projects unfinished and result in a new crop of non-performing loans.

New lending will rebound to about 500 billion yuan ($73 billion) in August after shrinking to 356 billion yuan in July, the official China Securities Journal reported.

In a report carried in the same paper, the SIC said China would stick to its "proactive" fiscal policy and "appropriately loose" monetary stance in the second half of the year.

"China's CPI has been falling for many months and it's a fact that mild deflation exists, so there is no basis for China to alter its monetary policy," the think-tank, which comes under China's economic planning agency, said.

It forecast that the consumer price index (CPI) would fall 1.3 per cent this quarter from a year earlier and the producer price index would decline 7.9 per cent due to the high base of comparison in 2008.

The SIC said the Chinese economy has bottomed out but is still growing below potential, mainly due to weak exports.

Exports would fall 20 per cent in the third quarter, compared with a year earlier, with imports dropping 12.7 per cent, the think-tank forecast.

Capital spending would remain a key driver for the world's third-largest economy, and urban fixed-asset investment was likely to rise 32 per cent in the third quarter, it said.

Strong investment is exacerbating many deeply rooted problems, including over-capacity, the think-tank said. It listed steel and cement as sectors with serious over-capacity.

"It is extremely bad for China's future industrial restructuring and upgrading," the SIC said.

It said property investment could potentially replace government spending as the next key driver of growth. – Reuters