China over­ca­pac­ity dark­ens Asia's 2016 growth prospects: ADB

The Pak Banker - - FRONT PAGE -

Huge in­dus­trial over­ca­pac­ity in China will drag on both the coun­try's and the re­gion's growth this year, the Asian Devel­op­ment Bank said Wed­nes­day, cutting its forecast for the world's sec­ond-largest econ­omy.

China's GDP growth is ex­pected to slow to 6.5 per­cent in 2016, the ADB said in its flag­ship Asian Devel­op­ment Outlook, low­er­ing its De­cem­ber forecast of 6.7 per­cent. With China cast­ing its shadow over the con­ti­nent, the bank also re­duced its pre­dic­tion for Asia's growth to 5.7 per­cent, down from 6.0 per­cent and slower then last year's ac­tual 5.9 per­cent ex­pan­sion.

China's "growth mod­er­a­tion and un­even global re­cov­ery are weigh­ing down over­all growth in Asia", said the ADB's chief econ­o­mist Shang-Jin Wei.

The doc­u­ment comes at a time of global un­cer­tainty about Bei­jing's abil­ity to make much-needed cuts to its steel, coal, and ce­ment sec­tors and man­age a tough eco­nomic tran­si­tion to a more con­sumer-led model.

China's econ­omy grew at its slow­est pace for a quar­ter-cen­tury last year, and con­cerns have been mount­ing it could soften fur­ther af­ter Bei­jing set a 6.5-7 per­cent tar­get for 2016.

"Weak ex­ter­nal de­mand and ex­cess ca­pac­ity in some sec­tors, on top of a shrink­ing labour force and ris­ing wages, con­tinue to in­duce a grad­ual de­cline in the PRC's growth rate," Wei said. A "sharp slow­down" in Chi­nese real-estate in­vest­ment will be a "drag" on the econ­omy, the bank added, al­though it would be partly off­set by con­sump­tion and green in­vest­ment.

The ADB's China eco­nom­ics head Jur­gen Con­rad said the gov­ern­ment "ur­gently needed" to ac­cel­er­ate cuts to ex­cess ca­pac­ity in real-estate and man­u­fac­tur­ing, and cited high cor­po­rate debt as an­other chal­lenge.

"Sup­ply-side re­form is what China needs and what Asia needs," he said, adding that Bei­jing would not use "shock ther­apy" to make changes.

Else­where across the con­ti­nent the prospects were brighter, how­ever, ac­cord­ing to the Manila-based bank. The ADB pre­dicted growth in In­dia, the fastest-ex­pand­ing large econ­omy in the world, would slow to 7.4 per­cent, from 7.6 per­cent in 2015, but would ac­cel­er­ate again to 7.8 per­cent in 2017.

"In­dia is grow­ing faster now than China... and is likely to re­main so in the near fu­ture," Wei said, say­ing struc­tural re­forms and im­prove­ments to labour mar­ket reg­u­la­tions would help boost ac­tiv­ity.

In­done­sia will lead South­east Asia as Jakarta ploughs cash into in­fras­truc- ture and en­cour­ages pri­vate in­vest­ment, the ADB added, pre­dict­ing GDP would grow 5.2 per­cent this year, up from 4.8 per­cent in 2015.

China's heavy in­dus­tries, many of them state-owned, have pro­vided mass em­ploy­ment for tens of millions of peo­ple but are in­creas­ingly loss-mak­ing and debt-rid­den.

Shut­ting in­ef­fi­cient com­pa­nies could cause fur­ther prob­lems, the bank said, po­ten­tially lead­ing to 3.6 mil­lion job losses and dry­ing up tax rev­enues for lo­cal gov­ern­ments.

"What China is now at­tempt­ing to do, in terms of the trans­for­ma­tion of the econ­omy, is ab­so­lutely un­prece­dented in hu­man his­tory," China coun­try di­rec­tor Hamid Sharif said in Bei­jing.

"We know from the ex­pe­ri­ence of other coun­tries that re­form is very much an art, and not a science.

"In ev­ery coun­try, de­ci­sions have to be made tak­ing into ac­count what is pos­si­ble, and what is achiev­able, rather than what some the­o­ret­i­cal econ­o­mist may sit in a room and de­cide ought to be done."

In the long run, the bank warned China faces a de­mo­graphic squeeze as the pop­u­la­tion ages, which in­creases pres­sure on au­thor­i­ties to act now to re­form the econ­omy.

"Ris­ing wages... and shrink­ing work­ing age pop­u­la­tion are fun­da­men­tal rea­sons why there will be a slow­down," ADB chief econ­o­mist Wei told re­porters in Hong Kong.

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