China’s economy is showing increasing signs of overheating, underscoring the need for policymakers to be vigilant in the months ahead, a sub-committee of the rubber-stamp parliament said.

Overly rapid credit and investment growth and a ballooning trade surplus were major problems facing the economy, official media cited the financial and economic affairs committee of the National People’s Congress as concluding.

“The trend of economic growth going from relatively rapid to overheating is becoming more evident,” Xinhua news agency cited the committee as concluding after it had consulted with regulatory bodies, including the central bank and the top planning agency.

It used the same phrasing as recent calls by Premier Wen Jiabao and the central bank for the government to “appropriately tighten monetary policy amid stability.’

It also said that China should continue to put the brakes on the supply of land and credit to rein in investment growth and also slow down the expansion of energy-intensive sectors.

The committee also said that China continued to face increasing inflationary pressures, driven by rapid growth in food and property prices.

“China should pay a high degree of attention to the problem of overly rapid growth in food prices, and closely monitor price changes in both domestic and overseas markets,” the committee said, according to Xinhua.

Some economists expect data due to be released on Thursday to show annual consumer inflation exceeding 4% in June, which they say would increase the likelihood of an interest rate rise or other monetary tightening.

China’s economy has been firing on all cylinders in recent months, with the trade surplus growing to $112.5 billion in the first six months—83% higher than in the same period last year—at the same time that investment and domestic consumption have continued to expand rapidly.

The committee also concluded that income inequality, along with insufficient government spending on social services and welfare, were the fundamental sources of China’s economic woes, which revolve around the economy’s over reliance on exports and investment.

Many economists say that the root of China’s liquidity problem lies in its large trade surplus, which spawns cash in the financial system when the central bank, in an effort to keep the yuan steady, buys much of the foreign currency generated by the surplus. (Reuters)