The Asian Development Bank (ADB) yesterday cut China's economic growth forecast to 9.5 percent from 9.8 percent for 2009, due to the expected reduced trade surplus and weakening domestic investment, but maintained its previous forecast of 10 percent growth for this year.

It also warned that inflation could reach 7 percent this year, much higher than the 4.8 percent target set by the government. The high inflation is mainly due to the exceptionally high rate in the first half of this year, the bank said. China's consumer inflation dropped to 4.9 percent in August from February's peak of 8.7 percent.

Given the signs of recent monetary policy relaxation, Zhuang Jian, a senior economist with the ADB in Beijing, said China's economic growth in the third and fourth quarters could stand at around 9.5 percent despite the global economic slowdown, which led many economists to forecast growth of less than 9 percent in the two quarters.

The central bank cut the cost of bank loans and reduced the reserve requirement ratio for smaller financial institutions on Monday. "This marks the start of a more relaxed policy, although the central bank remains cautious (regarding an overall relaxation)," Zhuang said. "Policymakers are tilted a bit toward maintaining economic growth."

In the coming months, controls over the loan quota may be further eased, he said, which will help bolster economic growth.

Rising domestic production costs and the continually weakening global economy, which reduces demand for Chinese products, would further slow China's exports next year, said Zhuang.

China's exports rose 22.4 percent year-on-year in the first eight months of 2008, down from 27.7 percent in the same period last year.

Growth in fixed-asset investment is also expected to fall, further reducing overall economic growth next year, he said at yesterday's release of the Asian Development Outlook report.

As US financial market turbulence further worsens, the Manila-based bank said Asia will be hit badly by the current financial crisis.

"The turmoil of the last eight days points to the clear and present danger that growth in the US could slip very, very sharply," ADB Chief Economist Ifzal Ali said.

For Asia, "the biggest risk was that the US financial crisis would affect the G3 economies (the United States, the European Union and Japan) indefinitely, hurting Asian exports and financial markets", he said. "If the impact goes beyond 2009 that will be very, very negative for Asia."

Economic growth in Asia this year is expected to stand at 7.5 percent and 7.2 percent next year, according to the report. In April, the bank forecast that growth would be 7.6 percent this year.

"If the subprime crisis worsens significantly, Asia is bound to suffer much more serious financial effects, including an abrupt reversal of the capital inflows that have held up well so far," the bank said in its report.