Japan, China and South Korea are showing signs of an economic revival that could help to pull much of the rest of Asia out of recession.
Officials in Bali are optimistic about signs of recovery in north-east Asia’s three economic powerhouses – but other economists are warning that the road back to growth could be hard and long.
ADB president Haruhiko Kuroda reflected the optimistic consensus, telling Emerging Markets: “Already in China and Korea we are seeing some signs of bottoming out, particularly in China.” The view on Japan is more cautious: Kuroda said he thinks it will “also bottom out”.
ADB chief economist Jong-Wha Lee told Emerging Markets: “Southeast Asian countries are very dependent upon these three, not only for export markets but also for foreign capital imports.”
The decline in business investment and in external bank inflows into Southeast Asia is “very worrisome”, he said. “We hope that Japan, China and Korea can maintain relatively strong economies and then they can provide capital to ASEAN.”
On China, Kuroda pointed to industrial production and bank credit trends. “Those statistics show some sign of bottoming out or even green shoots of recovery”, he argued. “In the case of Korea, in the first quarter, apparently the economy has bottomed out.”
But “whether these early signs of recovery can be sustained in coming months - that is the question,” said Kuroda.
He noted that, in Japan “inventory adjustment has been done very quickly and already some recovery of production is apparent. But again [the question is] whether this can be sustained and whether recovery is strong enough.”
Goldman Sachs chief economist Jim O’Neill is also optimistic on China. He has upgraded his forecast for Chinese growth in 2009 from 6% to 8.3% – even above China’s own 8% target - while suggesting that growth could surge to 10.9% next year.
Fiscal stimulus and other measures announced by the Chinese government since the onset of the global economic and financial crisis “have set the scene for a major acceleration of Chinese domestic demand for the rest of 2009 and 2010”, says O’Neill. This is “just the right recipe for China, and critically, the world”.
The ADB’s Jong-Wha Lee told Emerging Markets he is confident China can achieve growth of 7% this year. “China has maintained strong fundamentals, first of all coming from credit growth,” he said.
Lee nevertheless expressed concern that Chinese authorities could become over-concerned with short-term economic growth at the expense of longer-term priorities. The government should leave it to the private sector of the economy to allocate financial resources to other sectors, he suggested.
Some economists are concerned about the rate of bank credit expansion in China. According to Harvey Chen, president of First Light Academy of Global Economics in Shanghai, Chinese banks have been providing “an unprecedented amount of credit” to the economy recently.
Much of this is going to state-owned enterprises in China rather than to smaller enterprises that are badly in need of funds, he told Emerging Markets.
This raises questions of “whether the money is being put to good use,” he said, adding that the scope for “corruption and misuse of funds” is considerable.
Fred Hu, managing director at Goldman Sachs Asia warned that China’s government “must make sure [the goal of credit growth] doesn’t translate into political pressure to lend. That would be a recipe for disaster.”