Conference participants at last month’s Asian Financial Forum in Hong Kong were expecting growth in the region to continue, but there are downside risks, says Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC) in his latest letter from the president.
Chief among these risks is the threat of capital flows out of emerging markets generally, and toward the U.S., which is sparking memories of past currency and financial crises in the region.
“However, the consensus view was that this was unlikely to happen this time around because of remedial steps the Asian countries have made in the past 15 years,” Russell says. “Most of these countries have built up substantial foreign reserves; many are running trade surpluses; many have avoided accumulating large holdings of external debt; and the financial institutions in these countries are well-regulated and in good shape.”
Of course, China’s fortunes remain the key to the region. Russell notes that a deceleration of growth in China from current levels (8%-10%) “would diminish significant momentum from the global economy instead of adding to it, severely constraining Asia as a locomotive for world growth.” And, it would also impact commodity prices, and therefore the prospects for resource companies.
“The consensus was for a modest slowing in growth in China, to the 7-8% range, with some prominent speakers anticipating a steeper slide in growth to 6% or possibly lower,” he says. “The outlook for a modest slowing in growth is recognition that export-led growth, reinforced with the traditional driver of high levels of investment spending, is unsustainable.”
As the country undergoes a transition to a more consumer demand driven economy, there are fears that its growth rates will fall. “Historical evidence of this transition process, based on the experience of Korea and Japan, suggests economic growth decelerates sharply for several years until consumer demand and related investment spending strengthen and offset slowing export sector growth,” Russell notes. “Investment spending makes a similar transition from the state-owned sector to private business in response to relative investment returns.”
Next: Pressure for political reforms
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Pressure for political reforms
Amid this economic transition, China is also facing political reform pressures; and the government announced an ambitious package of reform measures back in November. “Some conference presenters saw the implementation of reforms as contributing to short-term inertia in economic activity, but eventually providing sustained momentum to the economy as reforms take hold, with growth accelerating to higher and more sustained levels,” Russell says.
Russell suggests that if these latest reforms are successful they “will unleash economic enterprise, notably private business, and enable a faster transition to a more balanced economy.” Although, he notes that balancing growth, the transition in the economy, and political stability will remain a “difficult challenge”.
“However, the effective management of the economy over the past thirty years, through a gradual opening and concomitant rise in prosperity, suggests China will successfully manage the transition process. Policymaking in the country always takes the long view,” he says.
While China is expected to continue powering growth in the region, recent fiscal and monetary stimulus in Japan is also expected to fuel growth. However, Russell says that “the sustainability of the emerging Japanese recovery was questioned.”
He reports that “some questioned if structural reforms could be implemented with sufficient vigor to ensure sustained economic revival in Japan.”