The ongoing financial crisis is taking a heavy toll on emerging East Asian countries, including China, with weakening exports, reduced investments and credit flows that have dried to a trickle. But a recent World Bank report predicted that China would be the first in the region to rebound from the deep downturns. Vikram Nehru, a senior economist at the World Bank, discusses why in the report. Edited excerpts follow:
Developing East Asia is battling the forces of global recession. With a shortage of dollar liquidity, shrinking exports and rising unemployment, many East Asian countries are facing a dim growth outlook this year, those underdeveloped nations in particular.
The governments in the region have responded quickly with expansionary monetary and fiscal policies, although in most cases these measures will only mitigate, not overcome, the contradictory forces operating on their economies. The World Bank forecasts that the emerging East Asian countries, excluding China, will see a minimum 1.2-percent GDP growth in 2009, reflecting the worse-than-expected unfolding of the financial crisis. Only China could largely hold up amid downward pressure and act as a driving force in the region because it has the following advantages.
First, China has limited dependence on external financing for liquidity. Its banks have emerged unscathed from the global credit turmoil and are readily increasing lending, initially for infrastructure projects and also for both companies and households.
Second, the Chinese Government has the fiscal capacity to put in place forceful stimulus measures. So far, the policy response to downturns has emphasized stimulating investment to bring the economy back on to the fast track. The combination of consumption exploration and efforts to improve the people's livelihoods will also inject steam into long-term growth. The advances in the service industry and rural consumption will render the vibrant growth more sustainable.
Third, China's economic fundamentals are strong enough to allow policy-makers a greater space to fight the economic slowdown. For instance, given the prospects of continued large current account surpluses, Chinese policy-makers do not need to worry about a somewhat reduced pace of capital inflows or even some net outflows.
With fixed investments recovering and consumer confidence on the rise, China's stimulus packages seem to be having an effect. Exports may also slow their pace of decline in March, but the external weakness will continue as Western economies are stuck in a limbo. One conundrum facing the country is the chilly employment that always lags behind in receiving support from stimulus packages.
China's rally will have great implications for the rest of East Asia due to its weighty economic importance. A return to stronger economic expansion in China next year should help support growth in the region. Thanks to China, growth in developing East Asia will be the fastest among the world's regions. The country's contribution to global incremental output has surpassed that of the United States since 2007 and is now the largest in the world, underpinning its role as a key pole of growth in East Asia.
Looking beyond 2009, the scope for faster recovery in the region will be helped by China, but will ultimately depend on the pace of recovery in the advanced economies. Medium- and long-term regional growth will largely depend on investment attractiveness, the ability of firms to innovate their technologies, more openness to trade and better developed private finance.