The World Bank said China is heading for a soft landing of growth in excess of 8 percent next year, and with most Asian nations has fiscal scope to cushion its economy from an escalation in Europe’s debt crisis.
Developing East Asia, which excludes Taiwan, Japan, Hong Kong, South Korea, Singapore and India, will see its expansion moderate to 7.8 percent next year from 8.2 percent this year, the Washington-based development lender said in a semiannual report yesterday.
While China faces the risk of a “strong” impact from a real-estate correction, its GDP will rise 8.4 percent next year and about that pace thereafter, the bank said.
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The report signals that Asia, which led the world out of the 2008 to 2009 recession, is poised to withstand the blows from any slump in demand for its exports or pull-back in credit by European banks.
The World Bank said countries with high investment rates, such as China, should focus on boosting consumer spending in any fiscal stimulus, such as with social -security and pension provision.
“Clearly the region is being affected by Europe and the global environment has weakened,” Bert Hofman, the World Bank’s chief economist for the East Asia and Pacific region, said in an interview with Bloomberg Television.
At the same time, “imports into China are holding up quite nicely and it is becoming increasingly a market for consumption goods of manufacturing countries in the region,” he said.
The World Bank’s growth projection for developing East Asia this year was unchanged from a March estimate. For next year, the lender said in March that growth would be around 8 percent.
Asian policymakers have shifted their focus to shielding growth, rather than stemming inflation, as Europe’s debt woes and a struggling US economy increase the risk of another global recession. Australia and Indonesia have cut interest rates this month, while the Philippines last month unveiled a fiscal stimulus package to spur the economy.
In China, “the risk in the short term of any hard landing is very limited — we believe that a soft landing will take place,” Hofman said.
The World Bank predicted China’s GDP growth would ease next year from a 9.1 percent pace this year.
East Asian countries had a median value of foreign-exchange reserves equivalent to 50.4 percent of GDP as of the middle of this year, or enough to cover 8.9 months worth of imports, according to the bank.
Policy makers in the region are “likely to hold off further policy tightening and stand ready to act should further negative shocks to growth occur or in the extreme case of a disorderly resolution of the euro zone debt problem,” it said.
In China, monetary conditions “remain accommodative” and there’s space for further fiscal stimulus if necessary, the World Bank said.
China’s central bank said on Wednesday last week that it can’t relax vigilance over inflation, as “the foundation of price stability is not yet solid,” while reiterating Chinese Premier Wen Jiabao’s (溫家寶) pledge to “fine-tune” policies when needed.
“Policymakers will need to walk a fine line guarding against the short-term risks to growth and the lingering vulnerabilities associated with a still-buoyant, if not overheated, economy,” the World Bank said. “To mitigate the vulnerabilities of continued low real interest rates, an easing of fiscal policy appears the most appropriate line of defense before the monetary policy stance is eased.”
While new capital rules being introduced in Europe will constrain the ability of the region’s banks to lend in Asia, high reserves and current account surpluses in most East Asian countries will protect them from the impact of possible renewed financial stress, the World Bank said.
“Bank credit flows remained stable through the first half of 2011 but represent an important risk, should European banks start deleveraging,” the Washington-based lender said. “Even if a definitive euro zone settlement is implemented successfully, European banks would likely need to deleverage and could reduce exposure to emerging markets.”
International banks reduced loans available to East Asian companies by about US$36 billion between the middle of 2008 and the first quarter of 2009, the World Bank said.
“An impact of similar proportions now could mean that over 30 billion dollars flow out, constraining credit available to the private sector,” the report said.
European banks have about US$427 billion of loans outstanding to developing East Asia, it said.
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