China's strongest earthquake in more than three decades is more likely to fan inflation than cool economic growth, economists said.

Economists say they aren't changing their gross domestic product growth (GDP) forecasts because Sichuan accounts for only 3.3 percent of the economy and any loss in production will be made up for by reconstruction work. A loss of farm output resulting from the quake may fuel inflation running near a 12-year high.

"Economic growth will not be lower but there will be higher inflation pressures," said Sun Mingchun, a Hong Kong-based economist at Lehman Brothers Holdings Inc. "In terms of monetary policy, it is probably giving more reason to loosen than tighten."

Sun, who expected food prices to fall in the second half, said the quake may "slow down the process of decline."

He also added: "The quake impact on inflation is more than its impact on growth."

Lehman said that losses in industrial production would slow growth "a little bit" in the next month or so, though reconstruction work in the second half would more than make up for this.

Consumer prices rose 8.5 percent in April, nearly at the fastest pace since 1996. Inflation could quicken to 10 percent in coming months, according to Glenn Maquire, chief Asia-Pacific economist at Societe Generale in Hong Kong.

Wang Tao, a Beijing-based economist with UBS AG, said any effect on inflation would be short-lived because the areas damaged by the quake were mountainous and not agricultural lands.

The loss of hogs is about one million out of a national stock of 400 million to 500 million, according to Liang Hong, a Hong Kong-based economist with Goldman Sachs Group Inc.

Rising bad debts at banks is the biggest worry for investors, said Sherman Chan, an economist with Moody's Economy.com in Sydney. "All the banks have announced they will lend more for the affected regions," she said. "It's great that the banks are helping the affected areas, but if you look at this as an investor you will be concerned. These people will have trouble repaying and you are lending more to them."

Chinese banks have offered 2.99 billion yuan of loans for reconstruction work, the China Banking Regulatory Commission said on May 19.

Bloomberg

(HK Edition 05/22/2008 page2)