China's economy faces serious inflation risks which, if unchecked, could fuel yet more speculation in stocks and property, the Organisation of Economic Cooperation and Development said Thursday.
Economic growth is likely to reach 10.7 percent in 2008 and 10.1 percent in 2009, the OECD said in its twice-yearly "Economic Outlook" report, meaning China would see seven consecutive years of double-digit expansion.
"The economy has moved to a situation of excess demand with increasing pressure on monetary aggregates," it said.
"If this situation persists, and global food prices do not moderate as expected, there is a risk of inflation becoming entrenched."
The OECD's warning coincides with a markedly growing emphasis on inflation among policy makers in Beijing.
The government's Central Economic Work Conference, the most important economic gathering of the year, ended in Beijing Wednesday with a call to make it a priority next year to curb inflation and avoid overheating.
Inflation in China hit a 10-year high of 6.5 percent in August and again in October, while for the full year 2007 it is likely to hit 4.4 percent.
"To date, most of the increase in inflation has been due to higher food prices," the OECD said. "Nonetheless, inflation indices that exclude food… have also started to increase slightly."
The OECD forecast that inflation would remain at this level for at least two more years, hitting 4.5 percent in 2007 and 4.6 percent the year after that.
"Speculative activity has already increased, both in the equities market and in real estate markets in southern coastal areas," it said.
"Faster inflation could give new momentum to this development and increase the risk of an eventual significant downturn in asset prices and activity, together with a worsening of the quality of the balance sheets of banks."
The OECD predicted that inflationary pressures could be alleviated in case of "a more pronounced and widespread slowdown" in the global economy.
"However, the probability of such an event is small relative to the probability of ongoing difficulty in slowing the Chinese economy to a sustainable growth rate," it said.
