Aug. 15 (Bloomberg) -- China's industrial production rose 18 percent in July, slowing for the first time in three months after cuts to export incentives.

Output grew less than June's 19.4 percent, the statistics bureau said today. The median estimate of 18 economists surveyed by Bloomberg News was for an 18.5 percent increase.

The slowdown isn't likely to ease government concern that the world's fastest-growing major economy may be overheating. Inflation jumped in July to the highest rate in more than a decade and economists say a report tomorrow will show investment in factories and property is accelerating.

``This is still a pretty robust number, highlighting the momentum of the Chinese economy supported by exports and retail demand,'' said David Cohen, an economist at Action Economics in Singapore. It's ``premature'' to speculate the economy is slowing, Cohen said.

China, the world's largest maker of cell phones, clothes and home appliances, reported an economic expansion of 11.9 percent in the second quarter, the fastest pace in 12 years.

Output growth was almost double that of India, the world's second-fastest growing major economy, in June. In 2006, China's industrial production grew 16.6 percent.

Rate Increases

The People's Bank of China has raised interest rates three times this year and ordered lenders to set aside larger reserves on six occasions. The central bank may increase rates this week, said Jim Walker, chief economist at CLSA Asia-Pacific Markets in Hong Kong.

China reduced export tax rebates on 2,831 types of products starting July 1. The government has also restricted project approvals, curbed land use and imposed environmental rules to cool factory and property spending.

``China's economy is still accelerating,'' said Amy Auster, senior economist at ANZ Banking Group in Melbourne. ``You wouldn't want to hang your hat'' on the output number indicating a significant slowing, Auster said.

Exports jumped 34.2 percent in July from a year earlier, the fastest pace in five months. Retail sales gained 16.4 percent, the biggest increase since May 2004 after adjusting for Lunar New Year distortions.

`No Guarantee'

Domestic demand and export growth mean ``there is no guarantee that the economy is going to slow in the third quarter,'' said Huw McKay, senior economist at Westpac Banking Corp. in Sydney.

The government wants to prevent cash from record trade surpluses from fueling inflation, stock and property speculation and factory spending leading to overcapacity.

For the first seven months, industrial production grew 18.5 percent from a year earlier. In July, automobile output jumped 32.7 percent and cement production rose 11.6 percent. Production of steel products climbed 23.9 percent.

China Datang Corp., the parent of a power generator, said it increased electricity output by 26 percent in the first half to meet rising demand.

Renesas Technology Corp., Japan's second-biggest chipmaker, plans to almost double production at its factories in Beijing and the eastern city of Suzhou.

`Overheating' Economy

The top economic priority for the second half of 2007 is to prevent ``overheating,'' according to the central bank and the National Development and Reform Commission, the chief economic planning agency.

The final key economic indicator for July will be released at 10 a.m. tomorrow. Fixed-asset investment in urban areas probably surged 26.8 percent in the first seven months from a year earlier, according to a Bloomberg News survey.

The government is also concerned by the environmental cost of being the world's manufacturing and assembly hub.

The largely coal-powered economy is a major source of acid rain and other pollutants in Northeast Asia and a significant contributor to ``global-scale air pollution,'' according to a report released last month by the Organization for Economic Cooperation and Development.

About one-third of China's lakes, rivers and coastal waters are polluted because of farming and industry waste and pose a threat to human health, the OECD said.

Premier Wen Jiabao said in March that the nation's growth is environmentally unsustainable.

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

Last Updated: August 15, 2007 03:00 EDT