China is managing to achieve the "soft landing" desired in its quest to contain inflation and overheating and should manage a shift to redirect growth from an investment and export-driven pattern toward more internal domestic demand, according to the Asian Development Bank's (ADB) most recent Outlook.

The ADB economists also note that China's policy has managed to curtail inflationary pressure from the 5% registered in August to a healthier 3% by the end of 2004 despite upward pressure of oil and other commodity prices.

With China representing 85% of the weight of the ADB's 42 member countries in the region, the entire area registered an average 7.3% GDP growth in 2004, the most robust since the economic and financial crisis of 1997-98, the ADB 17th annual Outlook released April 6 remarked. In referring to the entire ADB region, the Outlook also commented that "In spite of generally sustained high growth over the past few years and high oil prices, inflation in most countries remained largely subdued in 2004."

In addressing the threat of the Chinese economy overheating, the ADB Outlook notes, "Although there are signs that Government policies have been effective in reining in inflationary pressures and generating more balanced growth, the latest growth figures suggest that more austere measures of tightening may be necessary to curb overinvestment and achieve a soft landing. Failure to do so in the near future may increase the risk of a hard landing at a later date."

The ADB's yearly analysis of the region foresees the pattern of China's GDP growth shifting from manufacturing and construction, which is expected to slow down to a rate of 9-10% in 2005, toward services, which are expected to increase at a rate of 8%, rural income and consumer demand. Likewise, investment is expected to also slow to 18-20% which is still substantial, and export growth is forecast to drop from 35% to 18%.

Concerns about China's and the region's economic performance in the coming years arise from the uneven growth in other major economies such as the US, EU and Japan and possible shocks from epidemics of communicable diseases that could destabilise the region if uncontrolled. The huge US trade and budget deficits and the weakness of US dollar signal the need for and the expectation of an adjustment that could affect Asian, and especially Chinese, trade surpluses and currency exchange rates.

Continued structural reforms in Asia are also looked upon as a necessity for sustainable growth, says the ADB.