ADB urges caution over rapid growth

PUBLISHED : Tuesday, 18 September, 2007, 12:00am
UPDATED : Tuesday, 18 September, 2007, 12:00am

The mainland's economy could be hurt by soaring inflation and a possible stock market downturn, the Asian Development Bank warned yesterday as it lifted its forecast on the country's economic growth this year to 11.2 per cent.

Inflation was expected to hit 4.2 per cent this year, above the government's target of less than 3 per cent, on higher food prices, the ADB said.

A major correction in stock prices was likely to damage bank assets if borrowers suffered substantial losses in the market, the bank said. 'If the market rises too rapidly, a correction is possible. It seems that some bank loans to households and enterprises have been spent on speculating stocks, although no official data is available on the exposure,' ADB senior economist Zhuang Jian said at a briefing in Beijing.

An increase in bad loans would prompt banks to tighten lending and thus affect the broader economy, the ADB said in the Outlook 2007 Update report yesterday. A decline in stock prices would also crimp private consumption, it said.

The ADB yesterday adjusted its forecast on the mainland's gross domestic product for this year to an 11.2 per cent expansion from the 10 per cent estimate it made six months ago. It also lifted next year's forecast to 10.8 per cent from 9.8 per cent.

The revision for this year was in line with the World Bank's forecast upgrade to 11.3 per cent last week, following Beijing's announcement of a higher than expected 11.9 per cent GDP growth for the second quarter.

The ADB said the robust growth was expected to be spurred by external trade, rising rural income and infrastructure development, the Olympic Games and continued strength in the industrial sector.

The bank also revised its inflation estimate for this year from 1.8 per cent to 4.2 per cent. Next year, inflation was likely to be 3.8 per cent, higher than the 2.2 per cent in its previous forecast, as price reforms in the public utility sector would sustain high inflation even if food prices eased.

The consumer price index, a key inflation measure, rose 6.5 per cent in August from a year earlier, the fastest growth in 11 years, fuelled by an 18.2 per cent rise in food prices. Pork prices last month were 86.5 per cent higher than a year earlier.

'Adverse weather would lower domestic grain production at a time that imported grain prices are high. The pig disease behind the pork supply shortage might not be brought under control quickly,' Mr Zhuang said.

'Reforms on goods such as water, power and gas are likely to be launched gradually next year, increasing their prices, so even with an easing in food prices, inflation will remain relatively high,' he said.