Asia Briefing: South-east Asia growth forecast cut due to China slump

The Asian Development Bank (ADB) has cut its outlook for developing Asia, citing slower growth in China and India. The Manila-based lender has also revised down the growth forecast for the region, which includes 45 nations, for 2014 to 6.2 per cent, from its earlier projection of 6.7 per cent.

"We are optimistic, and in the longer term, Asia will enjoy resilient growth. But to safeguard financial stability, developing Asian economies need to accelerate structural reform," ADB's chief economist Changyong Rhee told The Irish Times.

The lender said developing Asia faces the twin challenges of maintaining financial stability and sustaining growth, and it added that concerns over the US scaling down a key stimulus measure, the quantitative easing programme, would also affect the region's growth.

Wider meltdown

Speculation over the US scaling back the programme has seen many investors pull out money from the region, and the turbulence triggered fears it would lead to a wider meltdown similar to the 1997 Asian financial crisis, but Mr Rhee said such fears were “unwarranted” because countries have since strengthened their foreign currency reserves, improved economic management and tightened financial regulation and supervision.

Slowing growth highlighted the need to push ahead with overdue reforms in areas like foreign direct investment, infrastructure development, fiscal consolidation and social-protection programmes in the region’s economies.

China, Asia's largest economy, has seen its growth hit by a decline in demand for exports from key markets such as the US and Europe, and its growth rate has slowed for two quarters in a row.

The ADB said growth in China is weakening after authorities took steps to rein in credit growth and the shadow banking industry, part of a master plan to steer the economy away from exports and investment and toward more sustainable domestic consumption.

“Regarding China, it’s difficult to say in a word. What they have been doing is on the right track and they are on a sustainable path. China is trying to rein in credit bubbles. All economic agents have to adjust to slower growth,” said Mr Rhee. Slower growth is the price of structural reform for the longer term, he added.

China's economy, the world's second biggest, is now expected to expand 7.6 per cent this year, down from 8.2 per cent forecast earlier this year.

Chinese growth

“China is a major player, and slower growth can have an impact. China growth is a major factor. By our calculations, a drop of one percentage point in Chinese growth translates into one quarter of a percentage point in developing Asian economies, and this figure is much higher for those with close links to China,” he said. In India, a slowdown in sectors such as manufacturing, coupled with a lack of reforms in key areas, has seen the country’s growth hit its lowest level in a decade.

The ADB also warned that growth in south-east Asia would be confounded by weak performances in Thailand, Indonesia and Malaysia, due to weak exports.

However, in the long run, Mr Rhee remained upbeat on the prospects for south-east Asia and said growth in the Asean (Association of South-East Asian Nations) countries offers a new opportunity. "China is moving towards the western regions as it tries to develop inland. Foreign investors have to rethink if they go inland or look to Asean economies to invest. Asean economies can gain new competitiveness," he said.