Asian econ­omy pre­pares for choppy seas

China Daily European Weekly - - COMMENT - W. Raphael Lam is IMF deputy res­i­dent rep­re­sen­ta­tive for China, and Al­fred Schipke is se­nior res­i­dent rep­re­sen­ta­tive for China. The views do not nec­es­sar­ily re­flect those of China Daily.

The out­look is gen­er­ally fa­vor­able but cer­tain eco­nomic re­forms are ur­gently needed for China to sus­tain its strong growth

in some coun­tries and a slower catch-up in pro­duc­tiv­ity.

Af­ter a slow­down last year, re­gional growth is fore­cast to speed up this year. Growth in the re­gion dropped from 5.6 per­cent in 2015 to 5.3 per­cent last year de­spite broad im­prove­ment in eco­nomic ac­tiv­ity in the sec­ond half of 2016. Net ex­ports con­tin­ued to pull down growth, but do­mes­tic de­mand re­mained strong, sup­ported by ro­bust pri­vate con­sump­tion. GDP growth is fore­cast to reach 5.5 per­cent in 2017, re­vised up by 0.1 per­cent­age points com­pared to the es­ti­mate in the IMF’s Oc­to­ber 2016 World Eco­nomic Out­look, and 5.4 per­cent in 2018. Ac­com­moda­tive poli­cies will un­der­pin do­mes­tic de­mand, off­set­ting tighter global fi­nan­cial con­di­tions.

The ag­gre­gate out­look for the re­gion, how­ever, masks dif­fer­ences across economies. Among the larger economies, pro­jected growth in China and Ja­pan for 2017 was re­vised up be­cause of con­tin­ued pol­icy sup­port and im­proved growth mo­men­tum to­ward the end of 2016.

China’s GDP growth is ex­pected to stay strong, although it could slow to 6.2 per­cent in 2018. Ja­pan’s growth is pro­jected at 1.2 per­cent, which could weaken along with fis­cal pol­icy con­sol­i­da­tion and the planned con­sump­tion tax in­crease. Some of the up­ward re­vi­sion in Ja­pan re­flects the com­pre­hen­sive re­vi­sion of the na­tional ac­counts this year. In In­dia, growth is pro­jected to re­bound to 7.2 per­cent in the fis­cal year 2017-18 and to 7.7 per­cent in 2018-19. In the Repub­lic of Korea, growth is ex­pected to re­main sub­dued at 2.7 per­cent this year, ow­ing to geopo­lit­i­cal un­cer­tainty, and in­crease to 2.8 per­cent in 2018. Pro­jected growth for Asia, ex­clud­ing In­dia and the ROK, was re­vised up in 2017 by 0.3 per­cent­age points com­pared to the es­ti­mate in Oc­to­ber.

Although global growth could get a boost from eco­nomic stim­u­lus in some large economies, par­tic­u­larly the United States, con­tin­ued tight­en­ing in global fi­nan­cial con­di­tions could trig­ger fur­ther volatil­ity in cap­i­tal flow. Pri­vate debt has risen in many economies in the re­gion over the past decade, and higher bor­row­ing costs could tip some com­pa­nies and house­holds over the edge and con­strain growth. More in­ward­look­ing poli­cies in ma­jor global economies would have a sig­nif­i­cant im­pact on Asia given that the re­gion has ben­e­fited sub­stan­tially from cross-bor­der eco­nomic in­te­gra­tion. A bumpier-than-ex­pected tran­si­tion in China would also have se­ri­ous reper­cus­sions.

China can sus­tain its strong growth, but needs to more ur­gently im­ple­ment re­form to do so. First, the prac­tice of set­ting high and hard growth tar­gets should be de-em­pha­sized, and the en­gine used to drive growth should switch faster from in­vest­ment and in­dus­try to con­sump­tion and ser­vices.

Sec­ond, a key part of this switch should be to re­duce pub­lic in­vest­ment while in­creas­ing so­cial spend­ing on ed­u­ca­tion, health­care and so­cial se­cu­rity.

Third, ex­ces­sive growth of credit, more gen­er­ally the fi­nan­cial sys­tem, should be slowed by tight­en­ing fi­nan­cial reg­u­la­tion and su­per­vi­sion (as is hap­pen­ing cur­rently).

Fourth, State-owned en­ter­prises should face hard bud­get con­straints so they be­come more pro­duc­tive and re­lease re­sources, such as credit, to be used more ef­fi­ciently by the pri­vate sec­tor.

Fifth, trans­parency needs to be in­creased, es­pe­cially in how poli­cies are com­mu­ni­cated and in the qual­ity of data pro­vided to as­sess them.

And fi­nally, mod­ern­iz­ing the pol­icy frame­work —in­vest­ing in soft in­fra­struc­ture —is needed to bet­ter man­age the econ­omy dur­ing the tran­si­tion.

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