'The fall in inflation is unbelievable,' said Tao Don , senior economist at the British investment bank Shroders. He now expects the retail price index to increase by a mere 4 per cent for the whole of 1997.

Chu Siu-wah, senior economist at DBS Securities, said he probably would have to revise down his original forecast of 6 per cent for this year. The benchmark retail price index rose by only 1.7 per cent last month - the lowest year-on-year rate since April 1991, and 2.6 per cent for the first quarter of the year, the State Statistical Bureau said on Thursday.

China forecast a 6 per cent rise in RPI this year after a 6.1 per cent increase last year.

That already was well below the 14.8 per cent recorded in 1995 and a communist-era high of 21.7 per cent in 1994.

Mr Tao said the sharp fall in inflation was due partly to the bumper harvest last year, which had led to continuous falls in grain prices.

Grain and other foodstuffs account for at least one-third of the components for the retail price index.

Falling prices of industrial products due to oversupplies and soaring inventories also had helped, he said.

With inflation to remain low, both Mr Tao and Mr Chu suggested Beijing should cut interest rates and the commercial banks' official reserve requirement at the central bank to release more money into the economy.

Mr Chu said the falls in retail sales and industrial output so far this year meant the economy was not as strong as expected.

China's economic growth is expected to rise by 10 per cent this year after an increase of 9.7 per cent in 1996.

However, Mr Tao said the government was faced with a dilemma.

On the one hand, it intended to increase money supply, but on the other it was worried the extra money to be released probably would flow to the stock market to fuel further speculation.

Last week, official media warned that China's two stock markets, which have risen by 40 per cent in the first three months, could overheat again.