Sept. 12 (Bloomberg) -- China's retail sales grew at the fastest pace in more than three years, buoyed by higher prices and rising incomes in the world's fastest-growing major economy.

Sales climbed 17.1 percent in August from a year earlier to 711.7 billion yuan ($95 billion) after gaining 16.4 percent in July, the statistics bureau said today. That beat the 16.5 percent median estimate of 23 economists surveyed by Bloomberg News. None predicted such a big gain.

While rising sales at Wumart Stores Inc. and Lianhua Supermarket Holdings Co. show that China is succeeding in boosting domestic consumption, the growth also fuels inflation that rose to a 10-year high in August. Consumer-price gains have accelerated for each of the past four months on food shortages.

``China can't afford to boost consumption too much until the government finds an effective mechanism to fight inflation,'' said Arthur Kroeber, head of research at Dragonomics Advisory Services Ltd. in Beijing. ``The two goals, to increase spending and curb prices, contradict each other.''

The pace of sales growth has accelerated for five straight months. The gain was the biggest since May 2004 after adjusting for distortions caused by China's Lunar New Year holidays.

The 6.5 percent inflation rate last month swelled the value of sales, while wage and stock-market gains underpinned demand. China has boosted minimum wages, expanded welfare payments and reduced a tax on interest income to fatten consumers' wallets.

Wumart Profit Jumps

The central bank, trying to prevent price increases spreading beyond food, last week ordered lenders to set aside bigger reserves for the seventh time this year. It has raised interest rates four times.

Wumart, Beijing's biggest supermarket chain, said profit almost doubled in the second quarter on rising sales. Lianhua Supermarket, China's biggest grocery chain, said sales rose 7.5 percent in the first half.

China is home to the world's biggest shopping center, South China Mall in Guangdong province, where attractions include a river with gondolas and a model of the Arc de Triomphe.

Sales of meat, poultry and eggs jumped 45.2 percent in August from a year earlier. Jewelry sales soared 53.3 percent and automobile spending rose 42.3 percent.

Disposable incomes among urban households climbed 14.2 percent in the first half from a year earlier and rural earnings climbed 13.3 percent. The benchmark CSI 300 Index has surged 150 percent this year.

Juice, Women's Shoes

``After stripping out inflation, the number is still accelerating and pretty strong,'' said Liao Qun, chief economist at Citic Ka Wah Bank in Hong Kong. ``Efforts to boost consumer spending have yielded results and retail sales in China will strengthen gradually.''

China Huiyuan Juice Group Ltd., the country's biggest maker of the beverage, said profit tripled in the first half. Earnings doubled at Belle International Holdings Ltd., China's largest retailer of women's shoes.

For the first eight months, retail sales gained 15.7 percent from a year earlier to 5.6 trillion yuan. The figures aren't inflation-adjusted.

Wages in Chinese cities and towns almost doubled in the past five years. Still, the absence of a comprehensive welfare system prevents some people spending more.

Waitress's Pay Packet

Huang Hongdie, a 21-year-old waitress in the southern town of Shenwan, said she earns about 1,300 yuan ($173) a month, spends a third on clothes and food and sends the rest home to her parents in Guangxi.

``I only spend on what is necessary,'' said Huang. ``My parents are old and I have to take care of them.''

China's economy, the world's fourth-largest, expanded 11.9 percent in the second quarter, the fastest pace since 1994. The nation wants to curb its reliance on investment and exports for growth.

``The rising probability of a U.S. recession and growing trade protectionism means China's export growth is at serious risk,'' Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong, said in an Aug. 30 report to clients.

Exports last year accounted for 7.3 percent of gross domestic product, up from 5.5 percent, according to China's statistics bureau.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net

Last Updated: September 12, 2007 03:56 EDT