Asian economies must take urgent action to guard against the impact of an inevitable slowdown in Chinese growth, leading economists have warned.
While China posted annual GDP growth of 10.3% in 2010 and 9.7% in the first quarter of 2011, consensus is mounting that growth is likely to slow down in the world’s second-largest economy over the next five years.
Chinese authorities have embarked on a round of monetary and credit tightening over the past year, which is beginning to slow growth rates, and has identified inflation fighting as its number one policy priority.
In addition, the government lowered its growth target to 7% in the 12th Five Year Plan, as part of a commitment to rebalancing the economy towards more balanced, domestic demand driven growth.
In a sign of these shifting priorities, Li Yong, vice minister of finance, said at the ADB annual meeting in Hanoi yesterday that “our focus is now on growth, but also on people enjoying the benefits of that growth”.
“The Chinese government itself is now engineering a slowdown of the economy, so a slowdown is to be expected,” Yasheng Huang, a professor at MIT, told Emerging Markets. The uncertainty is how sharp the deceleration will be: “that’s the critical issue,” he said.
Debate rages as to whether or the reduction in growth will be gradual, or whether China could face a hard landing, as the current investment-driven growth model proves unsustainable and consumption is unable to pick up sufficient slack.
Most economists admit that predicting the exact scale or timing of the slowdown is difficult, but in any case the impact on the region will be enormous.
Barry Eichengreen, professor of economics and political science at the University of California, Berkeley, said: “Determining the exact hour at which Chinese growth will slow and by how much is beyond the capacity of economic science. But the direction of the change – slower growth, and sooner rather than later – is incontrovertible, and the implications for Asia and the world will be profound.”
A significant slowdown in growth would have profound implications given China’s importance as a trading partner and driver of commodity demand.
Conversely, Eichengreen suggested that a move towards a more balanced, higher-value domestic-demand driven-economy could benefit other nations in the region, notably low-cost manufacturers such as Bangladesh and Vietnam, which could attract industrial capacity away from China.
But even if China does, as many economists expect, engineer a relatively benign landing, a shift to slower, consumer-focused growth will be less energy, commodity- and raw material-intensive, and therefore reduce Chinese demand for these products.
Huang said: “If it’s a hard landing, the implications are very clear, but even if it’s a soft landing ... the implications for other developing countries in the region is still quite substantial.
“So either way, it’s better for them to be prepared for a slower source of demand for raw materials and commodities from China.”
He said that the ability of regional economies to cope with this slowdown in demand would depend on “what they have done with the windfalls from the [current] surge of Chinese imports”. The “critical issue” is whether this money had been used to diversify economic structure.
Gerard Lyons, chief economist at Standard Chartered, told Emerging Markets: “The important lesson for the rest of region is: people should not be surprised if there is a setback in China at some stage. Rather than being surprised by it, people should factor that into their thinking.”