Asia’s Growth Prospects in Beijing’s Hands

 
 

A slowing Chinese economy has forced the Asian Development Bank (ADB) to cut its growth projections for Asia. Worryingly for financial markets, the fortunes of Asia’s heavyweight economy are having an increasingly significant impact on global equity prices too, meaning that the next Beijing market crash could be even tougher to shrug off.

In its Asian Development Outlook 2016, the ADB cut its projections for developing Asia’s economic growth on the back of a slowing China and a continued weak recovery in major industrial economies. From 5.9 percent gross domestic product (GDP) growth in 2015, the region is expected to slip to 5.7 percent GDP growth for this year and next, weakening the prospects for the world economy.

While Japan and the eurozone have “slightly improved” prospects, softer external demand will limit the U.S. recovery. The major industrial economies are expected to stay steady at 1.8 percent GDP growth in 2016, “inching up” to 1.9 percent next year, the Manila-based lender said.

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“[China’s] growth moderation and uneven global recovery are weighing down overall growth in Asia,” ADB chief economist Shang-Jin Wei said.

“Despite these pressures, the region will continue to contribute over 60 percent of total global growth. Countries across the region should continue to implement productivity-enhancing reforms, investment in under-supplied ‎infrastructure, and sound macroeconomic management to help increase their growth potential and insulate themselves from global instability.”

For China, the ADB forecast output would slow from last year’s 6.9 percent gain to 6.5 percent this year and 6.3 percent in 2017, which would put it below Beijing’s stated goal of 6.5 percent for the next five years.

Slowing exports, a falling labor supply and supply-side reforms aimed at curbing excess capacity are all seen contributing to the softer prospects for the world’s second-largest economy, which due to its “outsized linkages” could curb regional growth by as much as 0.3 percentage points.

However, Asia’s other emerging giant, India, is expected to remain one of the world’s fastest growing economies, with GDP growth rising from 7.4 percent this year to 7.8 percent in 2017. Last year, the world’s ninth-largest economy expanded by 7.6 percent on the back of stronger public investment, and further reforms aimed at attracting more foreign investment and strengthening corporate and bank balance sheets are expected to help maintain the momentum.

Elsewhere, Southeast Asia is set for a further pickup, with GDP growth projected to rise from 4.4 percent last year to 4.5 percent in 2016 and 4.8 percent next year, led by growth in Indonesia as it ramps up infrastructure investment and implements reforms that spur private investment, the ADB said.

On the downside though, the ADB said Asia’s average growth declined by 2 percent between 2008 and 2014, with some 40 percent of this drop attributed to declining productivity. Worsening demographics are also expected to crimp developing Asia’s growth by as much as 0.4 percentage points through to 2020.

“Implementing productivity-enhancing reforms to increase tertiary education, improve labor market flexibility and institutional quality, and to increase trade openness and financial capital integration, could increase growth potential up to 0.7 percentage points per year during the next decade,” the bank said.

“Other factors that could improve productivity include investment in modern technology and equipment; increased government effectiveness, and closing the productivity gap with the U.S. Sound macroeconomic management, which helps smooth out volatility, can also add as much as 0.1 percentage points to potential growth in the region,” it added.

International Monetary Fund (IMF) managing director, Christine Lagarde, has also urged policymakers to strengthen reforms ahead of the release of the IMF’s forecasts, which are expected to reveal a further lowering of the global economic outlook.

Lagarde told reporters that global growth was “too slow, too fragile and risks to its durability are increasing,” increasing the pressure on governments.

“Because growth has been too low for too long, too many people are simply not feeling it,” Lagarde said, later adding that economic frustrations and political uncertainty were “leading people to question established institutions and international norms.”

Lagarde also backed the Bank of Japan’s move to deploy negative interest rates in the fight against deflation, with BOJ governor Haruhiko Kuroda recently stating his willingness to consider further cuts in the face of a rising yen.

China Threat To Equities

However, for global equities, new research by the IMF suggests China is set to have an even greater influence on markets in the years ahead as it becomes further integrated.

According to the Washington-based lender’s latest “Global Financial Stability Report,” changes in emerging market asset prices “explain over a third of the rise and fall in global equity prices and exchange rates,” with rising financial integration the key influence.

But while spillovers from Chinese asset price shocks remain “limited” compared to those of financially more integrated emerging economies such as Brazil, Mexico and South Africa, the IMF said China’s influence would only increase.

The research said “among large emerging market economies, China is unique: news about its economic growth has an economically significant and rising impact on global equity prices. In the last five years alone, the impact of growth surprises from China on global equity prices has almost quadrupled. By contrast, changes in Chinese asset prices tend to have little effect on asset prices elsewhere.”

“Purely financial spillovers from China are still very small, but likely to grow considerably as China gradually continues to integrate into the global financial system,” the IMF’s Gaston Gelos said.

The IMF called on Beijing to improve its communication and transparency concerning policy decisions and goals, with emerging market policymakers urged to help foster a stronger domestic investor base and limit excessive increases in corporate debt.

Fortunately for Asia’s prospects, analysts have pointed to signs of a pickup in China’s economy, including a rise in the purchasing managers index above the crucial 50-point line for the first time in seven months. In February, the nation’s housing market showed its best performance since April 2014, with new home prices rising in 47 of its 70 largest cities on a monthly basis. Fixed asset investment has also beaten market expectations to grow by 10.2 percent in the first two months of 2016, helped by stronger public investment.

UBS analyst Wang Tao expects China’s GDP growth to average 6.6 percent in the first quarter, helped by Beijing’s fiscal and monetary stimulus measures and an improved property sector.

Meanwhile, Japan has moved to “front-load” fiscal spending to offset weakening demand from China, deciding to spend 80 percent of the 12.1 trillion yen ($110 billion) budget for public works in the first half of fiscal 2016. Japanese Prime Minister Shinzo Abe has stated that Asia’s second-largest economy “remains on a recovery trend,” although he has rejected calls for next year’s planned hike in the consumption tax to be shelved.

For Asia – and the world – an improvement in China’s growth prospects could help prevent a sluggish global economy slipping further backward in 2016. With the Group of Seven meeting set for Japan in May, there will be even further pressure on Asia’s big two economies to start firing again.

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