(China Daily)
Updated: 2007-09-18 16:15

It is reassuring that the developing Asian economies are performing soundly a decade after a devastating financial crisis swept across the region.

Driven by fast growth in China and India, the Asian Development Bank (ADB) raised its forecast for growth in the developing Asian economies to 8.3 percent in 2007 from an earlier estimate of 7.6 percent made half a year ago.

While uncertainty reigns in global financial markets and worries about the health of the US economy mount, such an upbeat forecast is full testimony to growing confidence in the region's ability to sustain economic growth.

The faster than expected growth momentum China built up this year can be well expected to carry into 2008. The Chinese economy grew 11.5 percent in the first half of 2007, which is the highest rate since 1994. It is not too bold to expect China's economic growth to reach 11.2 percent this year and 10.8 percent next year.

However, though ADB ruled out a "sharp dive" of the Asian economy despite uncertainties in credit markets and the broader global economy, Chinese policymakers should not miss the internal risks this development bank also identified in its new report.

Buoyed by exports, investment, and consumption, the Chinese economy is likely to defend against external shocks in the short term. But an upturn in inflation, mainly caused by food price increases, is raising concerns. The ADB report lifts China's inflation projection to 4.2 percent this year and 3.8 percent in 2008. It also warned that there is a risk that the actual out-turn could be higher still.

China's consumer price index surged to 6.5 percent last month, raising the inflation level between January and August to 3.9 percent, far exceeding the 3.0-percent target set by the central bank for all of 2007.

The country's inflation has risen mainly as the result of a run-up in food prices. Some people believe that as long as food price hikes do not spread to non-food items, serious inflation will be kept in check. Yet, rising global grain prices is undermining the prospect that a bumper harvest can stop the spike in domestic food prices.

Worse, soaring headline inflation is shifting people's inflation expectation, making it harder for Chinese policymakers to rein in inflation.

To achieve sustainable development, the Chinese authorities must not allow runaway inflation to erode its economic progress and the accumulation of people's wealth.

The ADB report also pointed out that rising stock and property values pose challenges for the country. It might appear reasonable to associate China's rocketing stock and house prices with the country's strong growth momentum and huge growth potential.

Nonetheless, policymakers should have a sober understanding of the severe consequence of asset bubbles.