High prices will continue to make life difficult for consumers next year because the government is likely to further deregulate prices of public utility items such as water, power and natural gas.
The Asia Development Bank (ADB) has forecast higher inflation. But it said China's economy would still be running on the fast track.
The sharp rise in food prices this year is going to ease next year but it would also open the way to implement planned reforms of items controlled by the State such as water, power and natural gas, the ADB said yesterday.
The government plans to deregulate the prices to let them reflect how scarce these necessities are becoming. Rising food prices have so far forced the government to defer reforms in public utilities.
"On this basis, the inflation forecast for 2008 will be 3.8 percent," the bank said at the release of its Asian Development Outlook in Beijing.
The central government considers a 3 percent inflation as a warning sign. But the rate has been higher than that for five consecutive months, with the August figure reaching 6.5 percent.
The ADB's higher inflation assessment coincides with the analysis of some leading domestic economists. Led by Peking University professor Justin Lin, they believe the country has entered a cycle of high prices because of the growing cost of labor, raw material, capital and other production factors.
The ADB forecast the national economic growth rate will reach 11.2 percent this year and 10.8 percent in 2008. The inflation projection, pushed up mainly by rising food prices, is 4.2 percent this year and 3.8 percent in 2008. Which means there is a risk that the actual inflation rate could be higher.
The ADB's confidence in China's economy conforms to the World Bank's forecast that it can maintain a strong growth momentum and absorb the impact of a slight global financial turmoil.
ADB economist Zhuang Jian said China needs fast development to create more jobs and balance income disparity, as well as take further steps to cool down investment.
Its "top priorities remain creating jobs for nearly 8 million surplus rural workers migrating to cities each year, and lifting the income of people in underdeveloped areas," Zhuang said.
The ADB report, however, says investment will remain high, supported by local governments that want to generate employment and expand their urban areas. Banks willing to lend and enterprises eager to increase their earnings, too, would like to see an increase in investment.
The ADB didn't show much confidence in the government's efforts to tame its fast-paced economy, saying more tightening measures have been taken to check the investment spree "but their effects are yet to be seen".
It accepted, though, that the country's economic growth slowed slightly during July and August after the GDP growth accelerated from 11.1 percent in first quarter to 11.9 percent in the second, the fastest since 1994.