The Chinese economy is on track to fare well this year if recent natural disasters do not disrupt grain supply and fuel high inflation, said Zhao Xiaoyu, vice-president of the Asian Development Bank (ADB).

The global economy is also unlikely to encounter a double dip, he told China Daily in an exclusive interview.

Despite the fall in July in the country’s procurement managers’ index (PMI), which measures economic expansion, policymakers will introduce new supportive measures if its economic slowdown continues, making it still attractive for foreign investment, analysts said.

Chinese economy ‘to fare well’
Zhao Xiaoyu, vice-president of the Asian Development Bank.

“The only problem for the Chinese economy is the potential impact of the natural disasters on its grain supply,” Zhao said.

“If the grain supply does not suffer much, it will not cause high inflation and the Chinese economy will not have major problems.”

The nation suffered severe droughts and low temperatures early this year and widespread devastating floods later in the summer. The output of grain harvested this summer fell for the first time in seven years, causing concerns that it will push up the price index, although the output dropped by 0.3 percent year-on-year.

But any hike in the country’s consumer inflation will be temporary and inflation for the whole year can still be within the government’s pre-set target of 3 percent, analysts said.

The prices of agricultural products rose 1.6 percent month-on-month in the first three weeks of July, compared with a decline of 1.6 percent in June, weekly data from the Ministry of Commerce showed.

“The jump in food prices was caused by severe flooding in many provinces in July,” said Nomura Securities in a report on July 29. It forecast that the upsurge in agricultural product prices will make China’s consumer price index jump to 3.5 percent year-on-year in July from 2.9 percent in June, the highest reading in 20 months.

But it said that agricultural product prices will likely fall in September or October when the flooding season ends, easing pressure on inflation.

“We expect consumer inflation to peak in July and average 3.3 percent in the second half, resulting in average inflation of 3.0 percent in 2010.”

With inflationary concerns easing, the weakening PMI, which fell for the third month in July, has aroused worries about the country’s worsening economic slowdown. But Chang Jian, economist of Barclays Capital, said policymakers will react positively if it happens.

“We continue to expect further moderation in growth in the second half of the year, but believe policy flexibility will help to support growth if needed.”

Nomura Securities said in a research note that, considering the heavy flooding around the country, the July PMI print should be viewed as better than its headline values.

“We judge that, unless the flooding continues into August, the next official PMI print is more likely to show a rise than a fall.”

China’s gross domestic product is expected to expand by an impressive 9.6 percent year-on-year this year, ADB’s latest report showed.

The country’s still steady economic growth makes it stand out among the struggling US economy and the turbulent debt-ridden European countries, to become a major destination of foreign investment, analysts said.

China, together with India, is a likely top foreign direct investment (FDI) destination for 2010-2012, said Tine Olsen, economist with Moody’s Economy.com.

“Continued economic expansion is vital, both for generating FDI within the Asia-Pacific region and from elsewhere in the world.”

Zhao from ADB also said that the world economy is not heading for a double dip despite the European sovereign debt crisis.

“History shows that there will not be another equally serious crisis following a major recession,” he said.

“All nations have been learning from the first crisis and taking measures to prevent it from recurring.”

The European countries are rushing to curtail their spending, which will help prevent the continent’s crisis from worsening, he said.

Zhao made the comments on the sidelines of the Business Development Forum in Urumqi, capital of the Xinjiang Uygur autonomous region, in late July. The forum is sponsored by the Chinese government and the ADB. It is part of the Central Asia Regional Economic Cooperation program.

Zhao also suggested that the Central Asian economies streamline their customs clearance procedures to facilitate cross-border trade.

“Our study shows that time for customs clearance on average accounts for 40 percent of the total time for goods delivery and we are working on a program to help those countries unify standards and procedures for customs clearance,” he said.

By Xin Zhiming