China’s economy probably grew the least in almost two years last quarter, contributing to a global weakening that Premier Wen Jiabao confronts with more limited scope for policy response than during the 2008 world recession.

The government is forecast to report July 13 gross domestic product rose 9.3 percent from a year before, according to the median estimate in a Bloomberg survey, down from 9.7 percent the previous quarter. With data two days ago showing consumer prices climbed the most in three years in June, any easing in the central bank’s monetary stance risks escalating price pressures.

China’s slowdown was underscored by the weakest import gain since 2009 in June, limiting the chance for the U.S. and Europe to export their way out of their own domestic challenges. A 58 percent jump in bank credit in 2009-2010 and concern that local governments may default on loans leaves Wen with less room to unleash the scale of stimulus that aided the world in 2008.

“Any significant policy loosening or introduction of another big stimulus right now would run the risk of plunging the Chinese economy into a real hard landing, with inflation running out of control and government debt and bad loans piling up,” said Lu Zhengwei, Shanghai-based chief economist at Industrial Bank Co., who was rated China’s best analyst in 2010 by China Business News newspaper. “Softer growth is more sustainable” and will help contain inflation, he also said.

Stock Rally

Stock investors have in recent weeks signaled optimism that China will achieve a so-called soft landing where the expansion slows without causing corporate earnings and employment to tumble. The benchmark Shanghai Composite Index has advanced for three straight weeks, the longest streak since February.

The rally may be tested today after the U.S. Labor Department reported the American unemployment rate rose to 9.2 percent in June. Payrolls increased by 18,000 -- a fraction of the pace needed to incorporate new entrants to the labor force, let alone recoup the millions of jobs lost since 2007.

China led the global recovery after the U.S. mortgage market’s collapse caused the world’s deepest postwar recession. The government announced a $586 billion fiscal stimulus and encouraged a credit boom that saw outstanding loans surge to 48 trillion yuan ($7.4 trillion) by the end of 2010. Inflation has been one consequence of the response, with consumer prices climbing 6.4 percent in June from a year before, according to a government report on July 9.

Pork Prices

Prices have also been fueled by shortages of food due to adverse weather conditions and a slump in hog supplies, a trend that’s contributed to rising social unrest across China. Pork prices jumped 57 percent in June from a year earlier, the government said last week, accounting for one-fifth of the month’s inflation rate.

The People’s Bank of China’s latest effort to contain prices came July 6, with the fifth interest-rate increase since October. The central bank has also boosted banks’ reserve requirements nine times since November to a record level.

Officials may also need to step up sales of bills to mop up liquidity sloshing into the economy from a widening trade surplus. Exports exceeded imports by $22.3 billion in June, the customs bureau reported yesterday.

“A premature loosening of monetary tightening will leave inflation expectations unanchored,” said Chang Jian, a Hong Kong-based economist at Barclays Capital. “We think one more interest-rate increase should be delivered” by the end of September, Chang said.

Imports Moderate

The trade gap was the biggest in seven months, led by a slowing in import gains to a 19 percent year-on-year pace. Exports also moderated, to an 18 percent advance, with U.S. and European demand a drag on growth, the customs bureau said yesterday.

The world’s second-biggest oil importer saw net inward shipments of crude drop to an eight-month low in June amid refinery maintenance and slowing energy demand. Copper imports fell 15 percent by tonnage last month from a year earlier, while rising 10 percent from May as traders restocked.

Higher costs are crimping profit at oil refiners and steelmakers. Angang Steel Co. said July 8 its first-half net income may have dropped 92 percent because of the “significant” increase in the price of raw materials and fuel, which “substantially exceeded” the increase in selling prices.

China’s leaders have pledged targeted fiscal measures this year, including a record low-cost housing program and efforts to address both water shortages and flooding. President Hu Jintao said last week that water infrastructure will be prioritized to enhance the security of grain supplies, state news agency Xinhua reported July 9.

Revenue Slowing

Fiscal revenue growth will slow in the second half after the government raised the threshold for the individual income tax by 75 percent, adjusted some levies and boosted tax breaks for smaller companies, Finance Minister Xie Xuren said in a posting on the ministry’s website July 9.

A broader fiscal initiative might worsen the risk of an escalation in non-performing loans among local governments, which helped to implement the stimulus of 2009-2010.

“The room for further fiscal maneuvering is much more limited now,” said Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong. “They are genuinely concerned about the local government borrowings.”

Banks’ overall bad-debt ratios may soar as high as 18 percent under a “stress-case” scenario, Moody’s Investors Service said in a report last week. The company said it was concerned banks were relying on the notion that the government would step in to help resolve their potential bad debt problems.