Slowing Chinese economy will cool growth in East Asia

A slowing Chinese economy will cool growth in  East Asia this year, but China has significant fiscal resources to help engineer a “soft  landing” and could cut taxes and raise s welfare spending, according to the  World Bank. In its twice-yearly report on the region, the Bank said Chinese  gross domestic product (GDP) would grow by 8.2% in 2012 compared with its  previous forecast of 8.4% – - before recovering to 8.6% in 2013.
Growth remains strong in developing East Asia and  Pacific, although it has slowed from its post-crisis peaks.
With the global  slowdown expected to continue, the region needs to reduce its reliance on  exports and find new sources of growth, says the World Bank in its latest East  Asia and Pacific Economic Update released yesterday.
According to the report, entitled “Capturing New  Sources of Growth,” developing East Asia and Pacific grew by 8.2% in 2011 (4.3%  excluding China), a sharp decline from the nearly 10% growth rate recorded in  2010 (7.0% excluding China). The region’s performance is still impressive on a  global scale.
In 2011, growth was about 2 percentage points higher than the  developing country average world-wide, and poverty continues to fall.
 ”The number of people living on less than US$2 a  day is expected to decrease in 2012 by 24m. Overall the number of people living  in poverty has been cut in half in the last decade in East Asia and Pacific,” said Pamela Cox, World Bank East Asia and Pacific Regional vice  president.
“Despite this success, about one-third of the people in the region,  roughly half a billion men, women and children still live in poverty. In an  uncertain global environment, more needs to be done to create new sources of  growth that provide opportunities for all.” Slowing in 2011 was largely due to lower than  expected growth in manufacturing exports as well as supply disruptions in the  wake of the earthquake and tsunami in Japan, and severe flooding in Thailand.  Domestic demand and investment were generally strong, aided by loosening of  monetary policy in some countries.

For 2012, the report projects that annual growth  will moderate further to 7.6% with slower expansion in China pulling down the  regional aggregate. Excluding China, growth will increase to 5.2% as Thailand  returns to normal levels of production.

Commodity exporters, which experienced a  boom in 2011, may be vulnerable in the event of a faster than anticipated  slowdown in China, which could trigger an unexpected drop in commodity prices. “Most East Asian economies are well positioned to  weather renewed volatility.

Domestic demand has proved resilient to shocks. Many  countries run current account surpluses and hold high levels of international  reserves.

Banking systems are generally well-capitalized,” said Bert Hofman,  World Bank chief economist for the East Asia and Pacific Region. “Still, risks  emanating from Europe have the potential to affect the region through links in  trade and finance.” The EU, along with the US and Japan, accounts for more than  40% of the region’s exports, and European banks provide one-third of trade and  project finance in Asia.

As external demand is likely to remain weak,  countries in developing East Asia and Pacific need to rely less on exports and  more on domestic demand to maintain high growth.

Already, many countries are  moving in this direction, but there is further scope for rebalancing.  “Some countries will need to stimulate household  consumption. In others, enhanced investment, particularly in infrastructure,  offers the potential to sustain growth provided this does not exacerbate  domestic demand pressures,” said Bryce Quillin, World Bank Economist and lead  author of the report.

 “With a changing financial sector in the aftermath of the  financial crisis, new ways to finance higher levels of infrastructure investment  need to be developed. Governments would need  to focus on accelerating the  preparation of infrastructure projects.

” In the medium-term, investment will enhance  productivity and drive growth through higher value-added activities and  innovation. Although large gains have been made in labor productivity across the  region since the Asian financial crisis of 1997-98, there is still large room  for further gains.

Policies to support the movement of labour among  countries can also be improved, suggests the report.  Improved regional  migration policies could enhance the gains from regional economic integration  and allow countries with declining working age populations to meet labor  demand.