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Economy Watch
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April 1 Updates
| The Potential of Asia's Developing Economies
Speaking at a conference in Vietnam, John Lipsky, First Deputy Managing Director, IMF shared his views on the potential of Asia’s developing economies.
Post Crisis Asia
The global economic and financial crisis had a dramatic impact to the global economy, 2009 global output was reduce by 1 percent. As we live in an integrated world, actions in one country, one sector, or one market can reverberate quickly around the world.
The anti-crisis policy action resulted in an unprecedented demonstration of global co-operation, global growth is expected to bounce back to about 4 percent in 2010 and to around 4.25 percent in 2011.
Asia is rebounding quickly, and the region’s vitality is helping to lead the way toward stronger global growth. Just as the region suffered from a sharp drop in international trade and finance flows during late 2008 and early 2009, the region is benefiting from the emerging global recovery. For example, net portfolio capital inflows surged to close to historical highs by the end of 2009, compensating in large part for the sudden stop of capital flows, including bank loans and direct investment that was associated with the crisis.
The other key driver for Asia’s recovery is home-based, and reflects the region’s swift and comprehensive anti-crisis policy responses. The responses were facilitated by strong pre-crisis foundations across the region, sound fiscal positions, and monetary policies more credible and sturdier corporate and bank balance sheets. Asia’s response to earlier crises left it better prepared to respond to another crisis. Many of these improvements were implemented in the aftermath of the 1997-1998 dislocations. The post 1997-1998 reforms provided Asian governments the opportunity last year to cut interest rates sharply and to implement large fiscal stimulus packages without creating dangers of policy excesses.
By and large, Asia is expected to grow by 8.5 percent this year, led by China and India. Asia benefited from China’s striking resilience to the crisis. China cushioned an export collapse with strong domestic demand, lifting credit constraints and implementing an exceptionally large fiscal stimulus. Others reaped rewards from China’s stimulus, including those relying on commodity and capital goods exports.
On Asia’s developing countries, Mr Lipsky said that their economies slowed less than in emerging Asia, partly reflecting their more limited integration into the global economy. Their exports to advanced economies held up better, as they relied less on high-value added advanced manufacturing exports and more on textiles and low-end manufacturing.
They also did not depend as much on private capital flows. Some countries such as Cambodia, Sri Lanka, and Vietnam loosened monetary policy. While some chose fiscal stimulus, including Bangladesh, Sri Lanka, and Vietnam.
Asia’s developing countries are different from their counterparts in other regions. Living standards are higher, populations are less marginalised, and the middle class is more important. On a scale, they lie somewhere between low-income countries and emerging markets, “verging on emerging” markets.
These countries are increasingly becoming integrated into regional trade network. In fact, one of the critical factors behind Asia’s rise over the past two decades has been the historic regional trade integration. If we look at the pre-crisis period, trade flows outside emerging Asia tripled between 1990-2006, while inter-regional trade involving emerging Asia rose by a factor of five, and intra-regional trade within emerging Asia increased by 8.5 times. Emerging Asia’s growth was driven by trade in intermediate goods, reflecting vertical specialisation. A sophisticated production network arose, facilitating “catch-up” through technology transfers, with China at the center, as a destination for intra-regional exports and the region’s leading export platform. Asia’s developing economies are very well poised to step into this production nexus and to move up the value chain.
This was the path taken by today’s dynamic emerging markets, and there is no reason why the region’s “verging on emerging” economies should not follow in their footsteps.
Asian economies can only make the leap if they address key policy challenges. Firstly, sound growth must be built on a foundation of macroeconomic stability. In some countries, fiscal deficits and public debt are huge, credit growth and inflation are high, and international reserves are low. As the recovery takes root, it will be important to rebuild policy buffers and to further improve financial sector soundness.
Secondly, structural reforms are needed to help boost competitiveness and to facilitate developing Asia’s entry into the regional and global trade network. Openness to trade remains essential is critical too. And strengthening financial markets would ensure a better allocation of capital, while providing savings and help raise household income.
Thirdly, enhancing long-term growth requires investment in infrastructure. There are still large infrastructure gaps in developing Asia, especially in areas such as transport, energy, and communications. The Asian Development Bank estimates that Asia-Pacific countries need to invest about $8 trillion over the next decade. Such investment would boost productive potential and help fight poverty in rural areas.
Lastly, countries need to strengthen social safety nets. Some Asian countries were able to cushion the impact on their citizens from the recent slowdown by providing social transfers. Vietnam, for example, already had social protection measures in place, while Cambodia and Laos partnered with donors and Civil Society Organisations on cash- and food-for-work programs. However, while institutional capacities and fiscal space vary widely across countries, more should be done across the board to protect the poor and vulnerable and to raise access to basic public services, including health care.
Developing countries will need sustained access to financial resources, to support required development spending and to address the vulnerability of developing countries to economic shocks from a variety of sources, including commodity price swings and natural disasters.
One of the risks facing the developing world is climate change. And Southeast Asia is one of the regions which is most vulnerable to climate change, given its long coastlines, its coastal concentrations of people and activity, and its reliance on agriculture, natural resources, and forestry. The budding effects of climate change already are notable, worsen by water shortages, threatening food security, and increasing health risks. If nothing is done, Southeast Asia could lose the equivalent of 6.75 percent of GDP each year by the end of this century, more than twice the global average loss. Asia must take action to ease and adapt to the effects of climate change. But this is a global challenge, and it requires a collective approach.
Tighter Lending Rules in China
China’s banking regulator tightened lending rules in the nation. The regulator ordered lenders to more cautious when making real-estate loans as part of the efforts to prevent property speculators from causing asset bubbles and bad debt.
The government announced that banks should not lend to developers found by state agencies to have held land without building houses. They should also stop approving new lines of credit to 78 government-controlled companies whose core business isn’t property development if they use collateral other than construction projects already in progress.
China’s property prices rose 10.7 percent in February, the greatest leap in almost two years, fueling concern that record lending and inflows of capital from abroad are creating asset bubbles in China’s economy. The government raised deposit requirements for buyers at land auctions to 20 percent of the minimum price to increase costs for developers. It also lifted banks’ reserve requirements twice this year and re-imposed a tax on home sales.
Liu Mingkang, Chairman of the China Banking Regulatory Commission (CBRC), said at a conference, “We have to closely monitor China’s asset bubbles.” Property prices have changed “quite a lot in the past five years,” he said.
Former U.S. Federal Reserve Chairman Alan Greenspan confirmed last week there are “bubbles” in China, without indicating whether they were in property or stocks. “There are significant bubbles in Shanghai and along the coastal provinces, but there’s some of that going back into the hinterlands as well,” Greenspan said in an interview on Bloomberg Television.
Crack Down
According to Bloomberg News, the latest regulation underlines concerns that banks may be at risk from companies that are speculatively raising capital backed by property investments. Banks must carry out “serious” examinations of developers that are repeatedly using the same pieces of land as collateral for loans.
“These measures are intended to urge developers with land to build houses and sell them quickly to increase market supply,” said Zhao Qingming, a Beijing-based senior analyst from China Construction Bank Corp., the nation’s second-largest lender. “It may curb fast growth in housing prices, but more measures are needed to tackle the root issue, including controls on land prices and speculative house-purchase investments.”
“We ask banks to check the qualifications of the developers and they must have a face-to-face check,” the CBRC’s Liu said. It was announced earlier this month that banks will vigilantly examine housing loans this year.
It was reported that there are “serious” bubbles in property prices in China’s major cities and about 60 percent of the residents can’t afford to buy an ordinary apartment.
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