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Rebalancing to sustain China's economy: Report
October 21, 2010, Thursday
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OUTPUT has recovered to above pre-crisis levels throughout developing East Asia and, in some countries, is expanding at near pre-crisis rates.
Real GDP is likely to rise 8.9 percent in the region in 2010 (6.7 percent if China is excluded), up from 7.3 percent in 2009 and in line with the average growth rate during 2000-2008.
Economic expansion is projected to slow to about 7.8 percent in 2011, as spare capacity becomes scarce, fiscal and monetary stimulus measures are gradually unwound, and economic growth in the advanced economies remains relatively flat.
Encouragingly, the private sector is once again becoming the engine of growth, confidence is returning, and trade flows have returned to pre-crisis levels. But the recovery so far has generated little incremental manufacturing employment in some of the middle-income countries.
With output gaps closing rapidly and private investment recovering strongly, the authorities in most East Asian countries are unwinding their stimulus measures.
But this is being done cautiously, as more evidence is needed to ensure the recovery is firmly entrenched.
Fiscal deficits are likely to remain above pre-crisis levels at least through the end of 2011. Their gradual reduction over time allows the authorities to address infrastructure gaps made more urgent by the crisis and maintain social safety nets to protect the poor, and provides an appropriate defense against subdued prospects for advanced economies.
Monetary policy has also turned cautious across the region, given rising inflation and a pickup in inflation expectations and policy rates have been raised to discourage imprudent risk taking that may impact financial stability.
The return of large capital inflows to the region, combined with rising inflationary pressures and climbing asset prices, presents an emerging policy challenge and a growing risk to macroeconomic stability.
The large increase in inflows, driven by abundant global liquidity and low yields in advanced countries, and reflective of foreign investors' confidence in East Asia's growth prospects, has been mainly responsible for a substantial appreciation of exchange rates, despite sustained exchange market interventions by central banks.
The surge in inflows, combined with ample domestic liquidity and rising confidence, has boosted equity and real estate prices in some countries.
Most monetary authorities have refrained thus far from introducing new capital controls.
But should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for robust capital inflows with ensuring competitiveness, financial sector stability, and low inflation.
China's growth prospects over the coming decade continue to look bright, but rebalancing the economy by altering the pattern of growth and investment is becoming increasingly critical to ensure sustainability - structurally, socially, and globally.
(The article is adapted from the World Bank's latest East Asia and Pacific Economic Update released on Tuesday.)
Real GDP is likely to rise 8.9 percent in the region in 2010 (6.7 percent if China is excluded), up from 7.3 percent in 2009 and in line with the average growth rate during 2000-2008.
Economic expansion is projected to slow to about 7.8 percent in 2011, as spare capacity becomes scarce, fiscal and monetary stimulus measures are gradually unwound, and economic growth in the advanced economies remains relatively flat.
Encouragingly, the private sector is once again becoming the engine of growth, confidence is returning, and trade flows have returned to pre-crisis levels. But the recovery so far has generated little incremental manufacturing employment in some of the middle-income countries.
With output gaps closing rapidly and private investment recovering strongly, the authorities in most East Asian countries are unwinding their stimulus measures.
But this is being done cautiously, as more evidence is needed to ensure the recovery is firmly entrenched.
Fiscal deficits are likely to remain above pre-crisis levels at least through the end of 2011. Their gradual reduction over time allows the authorities to address infrastructure gaps made more urgent by the crisis and maintain social safety nets to protect the poor, and provides an appropriate defense against subdued prospects for advanced economies.
Monetary policy has also turned cautious across the region, given rising inflation and a pickup in inflation expectations and policy rates have been raised to discourage imprudent risk taking that may impact financial stability.
The return of large capital inflows to the region, combined with rising inflationary pressures and climbing asset prices, presents an emerging policy challenge and a growing risk to macroeconomic stability.
The large increase in inflows, driven by abundant global liquidity and low yields in advanced countries, and reflective of foreign investors' confidence in East Asia's growth prospects, has been mainly responsible for a substantial appreciation of exchange rates, despite sustained exchange market interventions by central banks.
The surge in inflows, combined with ample domestic liquidity and rising confidence, has boosted equity and real estate prices in some countries.
Most monetary authorities have refrained thus far from introducing new capital controls.
But should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for robust capital inflows with ensuring competitiveness, financial sector stability, and low inflation.
China's growth prospects over the coming decade continue to look bright, but rebalancing the economy by altering the pattern of growth and investment is becoming increasingly critical to ensure sustainability - structurally, socially, and globally.
(The article is adapted from the World Bank's latest East Asia and Pacific Economic Update released on Tuesday.)
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