Asian economies face headwinds from three weak factors: weak global recovery, weak global trade, and weak (rather moderating) Chinese growth. To deflect such headwinds, the economies need to focus on productivity-enhancing structural reforms, which are needed to rebalance demand-supply, reduce vulnerabilities, enhance efficiency, and to expand the frontier of potential growth. Meanwhile, monetary policies need to be harmonized not only in Asia, but among advanced economies as well.
What could be the potential spillovers from China’s economic transition toward a more sustainable growth? Note that China moving on this path (means living with slower growth than in the past years) would mean slower demand for raw materials and intermediate goods, which in turn means trouble for economies whose activities survive on exporting such goods to China (they are also facing slow global recovery [plus low commodity prices], which in turn is slowing down demand for final goods either made or assembled in China). Also China is beginning to produce more intermediate goods rather than importing them for use in final goods as before. The rebalancing of the sources of growth in the Chinese economy has consequences beyond its borders.
China accounts for about one-half of regional growth and is an important factor in the regional supply chains.
According to the latest regional economic outlook, the IMF argues that:
- Asia has become more sensitive to the Chinese economy (which is moving away from high public investment and exports to higher domestic consumption and services). The rebalancing of Chinese economy will have adverse short-term effects in the rest of Asia. This may be less painful for economies that respond to Chinese consumption demand.
- Estimates show that a 1 percentage point slowdown in Chinese growth translates into a 0.15–0.30 percentage point decline in growth for other Asian countries in the short term. Taiwan, South Korea and Malaysia are likely to be affected the most.
- Commodity exporters such as Australia, Indonesia, Malaysia and New Zealand will suffer from slowdown in Chinese economy (as it imports a lot from them) and lower global commodity prices.
- Disruption to the financial sector in China also poses risks to the global economy. Rapid credit growth, high levels of NPLs, large shadow banking, and growing corporate and local government debt may be disruptive and could affect cross-border financial linkages (forex markets, trade insurance, equity markets, etc)
The IMF recommends:
Although the global economic panorama remains turbulent, policymakers in Asia will need to continue to build on the region’s strengths. Harnessing Asia’s potential will call for strong implementation of a wide-raging policy agenda, including enhanced communication of policy frameworks and goals. Structural reforms, aided by fiscal policy, should support economic transitions and bolster potential growth. Monetary policy should remain focused on supporting demand and addressing near-term risks, including from large exchange rate depreciations and deflationary shocks. Policies to manage risks associated with high leverage and financial volatility will play an important role, including exchange rate flexibility, targeted macroprudential policies, and in some cases, capital flow measures. Finally, policy recalibration should not lead to a buildup in vulnerabilities.