China's trade surplus has shrunk and factory gate inflation has soared to a 12-year high, official data showed Monday, as the country's stock market plunged 9.4 percent in two days.

The benchmark stock index closed below the psychologically important 2,500 mark, reflecting serious concerns about where the economy was heading, observers said.

"Investors were jittery over the economy outlook," said Zhang Fan, a Shanghai-based analyst with Tebon Securities, according to Xinhua news agency.

"They were also worried about the fluctuating global oil and raw material prices and stock market turbulence."

The benchmark Shanghai Composite Index, which covers both A and B shares, shed 135.65 points to 2,470.07 on turnover of 41.5 billion yuan (6.1 billion dollars).

Underlining China's more fragile economic position, its trade surplus fell 9.6 percent to 123.7 billion dollars in the first seven months of 2008 compared with a year ago, according to customs authorities.

"The slowdown in other economies has weakened the demand for Chinese products," said Peng Wensheng, a Hong Kong-based analyst with Barclays Capital.

"Meanwhile, the value of imports has jumped on surging international commodities prices — even if the volume may have remained roughly the same," he said.

The surplus has been a source of bitter friction with major trading partners such as the United States and the European Union.

But China's exports have weakened in recent months mainly because of a global economic slowdown and a gradual strengthening of the Chinese currency, the yuan.

As a result, Chinese policymakers have quietly adopted measures to help the nation's exporters.

"Clearly, policymakers have come to a conclusion that their focus will shift from simply curbing inflation in the previous months to both containing inflation and maintaining fast economic growth," said Peng.

Beginning this month, China improved tax incentives for exporters of some textiles and apparel, moving to support companies struggling amid weakening foreign demand.

Observers have also said a recent slowdown in the rate at which the yuan is strengthening against the US dollar may reflect an attempt to keep Chinese export prices competitive.

Meanwhile, China's producer or wholesale prices rose at their steepest rate in 12 years in July, state media said Monday, amid lingering concern about inflation in the world's fourth-largest economy.

The producer price index, which measures the value of finished products when they leave the factory, jumped 10.0 percent last month from a year earlier, the highest since 1996, Xinhua reported.

"The producer price index rose quite fast, which poses a rather big threat" of higher inflation, Qi Jingmei, an economist with the State Information Centre, a government think-tank, told AFP.

Producer prices are a critical measure of economic trends because they tend to spill over into consumer prices, which directly affect the lives of China's 1.3 billion people.

July producer prices were released a day before China was scheduled to publish key monthly consumer inflation figures.

Some analysts argued that the steep growth in producer prices would fan policymakers' concern over inflation, forcing them to take more steps to tighten credit.

"The interest rate will definitely have to be raised although China is trying to delay the next hike," said Andy Xie, an independent economist in Shanghai.

"It's like you build a dam to fend off inflation. But it will collapse when the problem gets too big."

China's central bank has raised the amount of money banks must keep in reserve six times this year to 17.5 percent in a bid to cool the economy by reining in credit growth.

But it has hesitated to introduce any interest rate hikes so far in 2008, partly due to a slowdown in economic growth.

China's economy expanded by 10.4 percent in the half of the year and 10.1 percent in the second quarter, down from growth of 11.9 percent recorded for all of 2007.