As mentioned in my last post, I was in Asia just a few weeks ago, and one (favorite) destination was Beijing.
Getting a clear view on where China’s economy is heading is not easy at the moment, as evidenced by large variations in GDP growth forecasts. One of the confusing developments is that while exports have continued to do badly recently, the domestic economy has exceeded most observers’ expectations by a wide margin.
Working in recent weeks on the World Bank’s new China Quarterly Update, released today, we have been trying to determine how the economy has been doing on balance, what the prospects are, and what this means for economic policy. In this blog, I will summarize our understanding of recent developments and prospects, leaving the upshot for economic policies for a later discussion (keep reading after the jump).
I apologize for the lack of recent posts, but I have been traveling in the region and then getting over a cold, so I’m finally back in action. One of the stops during the trip last month was to Jakarta to participate in our internal Economist’s Forum. This forum was very interesting and included sessions with the Indonesian Minister of Finance, as well as the
This somewhat provocative question was the title of a conference hosted by Oxford and Standard Charter this week in London. My answer was: "No, not tomorrow; but yes, eventually – especially if China continues to vigorously pursue economic reform."
The reason that China cannot be the engine of global growth tomorrow is straight-forward. For the last decade an awful lot of the final demand in the world has come from the U.S. That era is over for the time being as U.S. households now concentrate on rebuilding their savings. No one country can fill the gap left by the slowdown in U.S. consumption: Japan, Germany, and China together have less consumption than the U.S., so no one of them can replace the U.S. as the major source of demand in the world. It's not realistic to expect China to play that role. But we are probably moving into a more multi-polar period in which there is more balanced growth in all of the major economies.
We are finally starting to see some positive news around the East Asia and Pacific region, but it is too soon to begin to speak of "green shoots" of economic activity or reaching the bottom of the economic downturn in Asia. Although the Swine flu (one disease originating from animals that did not come from Asia!) and the nervousness about the condition of U.S. banks had a slightly negative impact on financial markets in Asia this past week, the stock markets are still up by about 12% for the year – led by Indonesia (21.6%), Korea (11.8%), and China (9.4%).
In terms of big newsworthy events in Asia, one of the biggest has to be the anti-government protests in Thailand. A relatively small number of protesters dramatically caused the cancellation of an ASEAN+3 meeting held in Pattaya this past weekend where 10 regional heads of state were evacuated. The World Bank President, as well as the head of the IMF and UN, were turned around at the airport in Bangkok. Although the protests around the country have effectively ended after martial law was declared and two protesters died, the damage of this may be longer-lasting. Although a discussion of the politics would be interesting, let's concentrate on the finance-related issues.
With the release last week of its latest quarterly assessment of the Chinese economy, the World Bank lowered its projection for China's GDP growth to 6.5 percent in 2009, yet remained optimistic that the country's economy has started to show signs of stabilizing amid global financial turmoil.
|Click chart to see larger version.|
We launched our China Quarterly report today with our take on how to reconcile the conflicting data. Clearly, the global economy is in very poor shape. Global GDP declined at an annualized rate of 5% in the fourth quarter of 2008, and global industrial production declined at a 20% rate. These are shocking numbers that those of us born after the 1930s have never seen. Naturally this has had a large effect on China, which is an open, export-oriented economy. China's seasonally adjusted monthly exports peaked at around $120 billion last fall, and then fell off a cliff – dropping by about one-third (see chart).
There has been a noticeable lack of entries to the East Asia & Pacific finance blog recently, but unfortunately I've been otherwise occupied on a trip in Beijing. It has certainly been a busy time here in China's capital with the National People's Congress (NPC) going on. However, I haven't seen much of it other than the long traffic jams caused by the road closures. The NPC meetings covered some of the domestic economic stimulus plans, but it has not dealt directly with financial sector issues. Maybe it did not need to since the banks here have already responded to the stimulus.
A recent China Daily report had a great graphic that showed the recent boom in lending by the banking sector, which corresponds very nicely to the announcement of the original economic stimulus plan. As I highlighted in a prior blog post, the $586 billion economic stimulus plan announced in November was only 30 percent funded from the central government, and the expectation was that much of the rest was to come from state-owned banks. Well, it seems they have delivered with gusto!