Services sector contracts

Zhang Zhiwei, the chief economist in China for Nomura Securities Co Ltd, said that the government is likely to tighten regulations on "shadow banking" activities in the second quarter, which may slow the GDP growth to 7.5 percent from 7.7 percent in the first three months.

"As inflationary pressures ease, that provides policymakers with more flexibility to adjust the pace of policy tightening," Zhang said.

Qu Hongbin, chief China economist with HSBC Holding PLC, added: "Counter-cyclical spending launched earlier continues to support domestic demand as indicated by the strengthening of infrastructure investment."

"This, combined with relatively loose liquidity conditions and benign inflationary pressure, should sustain a modest growth recovery in coming quarters," he said.

"We expect the economy to continue to recover, yet there is greater uncertainty around the pace of the recovery."

Analysts said that external economic conditions will remain uncertain, with the US expecting a mid-year slowdown and as European countries continue their anemic recovery, which may weigh on China's outlook in coming months.

Lian Ping, chief economist at the Bank of Communications, suggested easing the tax burden on companies, which would help improve profits and raise confidence.

A speed-up in government expenditure would also be "an efficient measure to stabilize growth in the first half". He expected that consumer prices will remain stable in the first six months and annual inflation may cool to 2.8 percent.