21 February 2019
China's economic rebalancing will be bumpy, affecting the prospects of the Asian region as a whole. Photo: Bloomberg
China's economic rebalancing will be bumpy, affecting the prospects of the Asian region as a whole. Photo: Bloomberg

Asia: Sailing in turbulent times

Asian economies are sailing in choppy waters, facing severe headwinds from an uncertain and challenging global environment.

First, the global recovery has been uneven and weaker than expected. On top of that, global trade has been sluggish and financial conditions have been volatile.

The rise of China as a global economic superpower has also created challenges of its own, as China’s necessary rebalancing from manufacturing towards services and investment to a consumption-driven economy—critical for both China’s and global growth over the medium term—remains bumpy.

As elsewhere, many Asian economies face risks associated with natural disasters and geopolitical and domestic political uncertainty. But all is not doom and gloom, as Asia also remains the major engine of the global economy: it continues to provide nearly two-thirds of global growth.

In addition, the region has policy buffers such as current account surpluses and high reserve levels and is likely to benefit from further economic integration and regional and multilateral trade agreements such as the Trans-Pacific Partnership.

Asia’s growth is moderating slightly, in line with the rest of the global economy. According to the most recent IMF World Economic Outlook, activity in the region moderated in the second half of 2015, and is expected to continue decelerating in the near term.

GDP growth for the region is forecast at 5.3 percent in both 2016 and 2017, a meager 0.1 percentage points lower than in 2015. In addition to weaker global growth and sluggish trade, the moderation in regional growth also reflects the ongoing necessary rebalancing in China.

But while external demand is relatively weak, domestic demand, particularly consumption, is expected to remain resilient across most of the region. The relative strength of domestic demand is due to generally low unemployment, lower commodity prices (which is a boom to oil and commodity importers), economic stimulus in some countries, and ongoing secular trends, including steadily rising disposable income.

The moderation in Asia’s growth masks important differences within the region. In China, GDP growth is expected to continue to moderate to 6.5 percent this year and 6.2 percent in 2017. This reflects ongoing rebalancing and other structural reforms, which are expected to continue to boost consumption and the services sector, while investment and manufacturing remains relatively weak until excess capacity is resolved.

India, on the other hand, is expected to remain the fastest-growing large economy in the world, with GDP expanding by 7.5 percent in 2016-17, underpinned by strong private consumption and helped by lower oil prices.

In Japan, GDP growth is projected to remain at 0.5 percent in 2016, slowing to -0.1 percent in 2017 as the widely anticipated consumption tax rate hike (from 8 to 10 percent) kicks in, though this forecast does not incorporate likely offsetting measures to support activity.

Growth in Hong Kong SAR is expected to remain below potential and to slow to 2.2 percent in 2016, from 2.4 percent in 2015, with private consumption growth expected to moderate due to lower tourism inflows and receipts from Mainland China, and negative wealth effects from stock market and property market adjustment.

Despite a robust outlook for the region, downside risks continue to dominate the economic landscape. Global growth could slow by more than expected or financial conditions could tighten suddenly. As many economies in the region have seen debt levels rise rapidly over the last decade, a combination of slower growth and higher borrowing costs could tip some corporates and households over the edge and further constrain growth.

In addition, regional growth is more dependent on China than ever before. While rebalancing in China is a price worth paying for in terms of durable and resilient growth over the longer term, the short-term transition is likely to be bumpy and the impact on countries and markets is likely to vary.

Countries that export goods that support China’s investment and construction (producers of metals, for example) would be adversely affected, while others that export consumer goods to China or are destinations for rapidly-growing Chinese tourism could benefit.

In addition, China’s move to higher value-added production will provide opportunities for low-income Asian countries, particularly in labor-intensive sectors, such as apparel, footwear, furniture, and plastic toys. Already Bangladesh, Cambodia, and Vietnam have seen market share gains in these sectors.

Financial linkages are also growing with regional markets becoming more sensitive to shocks from China after the global financial crisis.

For Hong Kong, closer integration with Mainland China has brought a number of benefits but it also entails spillovers to the economy, positive and adverse ones. The real sector linkages are particularly evident in the tourism sector and financial linkages have also deepened in recent years.

With strong fiscal and financial buffers in place in Hong Kong, the risks look manageable as long as the ongoing adjustment in Mainland China remains orderly. Over time, as economic rebalancing makes China’s growth model more resilient and sustainable, the region is likely to benefit.

A wide range of policies can be used to harness the region’s potential. In addition to building buffers, policymakers should deploy macroeconomic policies to boost demand if needed.

But more importantly, structural reforms will be key to support economic transition and the emergence of new growth models. This will bolster regional potential growth, and ultimately, strengthen the region’s resilience to global shocks.

Structural reforms and policies, particularly fiscal policy, should also tackle long-standing challenges, such as rising inequality, which will help make growth more inclusive. The key in this regard is to provide equality of opportunities, in particular to broaden access to education and health and promote financial and gender inclusion.

Looking to the medium term for Hong Kong, the current macroeconomic policy framework, flexible domestic markets, and linked exchange rate system, together with financial sector policies focused on resilience, have provided an anchor for expectations and a cornerstone of stability which have served the city well over the past three decades and should be preserved.

Fiscal policies will need to aim at addressing the challenges posed by an aging population while at the same time nurturing innovation to foster talent and opportunities for the younger generation.

In the near term, fiscal space needs to be proactively used to cushion the economy against negative shocks while adjusting the property-related macroprudential measures based on evolving financial stability risks.

Sally Chen, IMF Resident Representative for HKSAR, is the co-writer of this article.

– Contact us at [email protected]


Joong Shik Kang is a Senior Economist in Asia and Pacific Department of the International Monetary Fund (IMF).

EJI Weekly Newsletter

Please click here to unsubscribe