ADB lowers Asian economic growth forecasts
The Chinese economy will grow less than seven percent this year, the Asian Development Bank predicted on Tuesday, as it warned of widening fallout from the country’s economic slowdown.
In revisions to its annual Asian Development Outlook, published in March, the ADB lowered its growth forecast for China to 6.8 percent from 7.2 percent. The Chinese government has targeted economic growth of ‘about seven percent’ in 2015.
The US and Japan-led bank also revised down its expectations for economic growth in India to 7.4 percent from 7.8 percent, citing “external demand weakness and a slower-than-expected pace of enacting key reforms”.
As a result of the economic challenges confronting Asia’s largest and third-largest economies, the ADB said economic growth for the entire region this year would be 5.8 percent, compared with its March forecast of 6.3 percent.
In light of the regional slowdown and a strengthening dollar, Shang-Jin Wei, chief economist, warned that some countries needed to guard against capital flight and overseas borrowing. According to the ADB, in the first quarter of the year net capital outflows from developing economies exceeded $125 billion.
Over the past year, China’s foreign exchange reserves have declined by $400 billion.
Last week, the US Federal Reserve pulled back from its first interest rate rise in nine years, citing external concerns such as the global fallout from China’s summer stock market collapse and its ‘one-off’ devaluation of the renminbi last month.
“Developing Asia is expected to continue to be the largest contributing region to global growth, despite the moderation, but there are a number of headwinds, such as currency pressures and worries about capital outflows,” Wei said.
“In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement macroprudential regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing.”
According to the ADB, more than 65 percent of corporate debt in Vietnam, Sri Lanka and Indonesia is denominated in foreign currencies.
“Countries need to be able to absorb external shocks that can be triggered by interest rate developments globally,” added Jurgen Conrad, head of the ADB’s China economics unit. “Governments need to be fully aware of what kind of capital flows they are attracting and what could happen in a stress situation.”
The bank added that Southeast Asia was “bearing the brunt of the slowdown in China” as it lowered its 2015 growth forecast for the region to 4.4 percent from 4.9 percent.
Conrad described China’s slowdown as a ‘controlled deceleration’ consistent with the government’s efforts to rebalance the economy further away from its traditional reliance on investment. “China is making fast progress on rebalancing — faster than we expected six months ago,” he said.
The ADB also cited a series of “one-off factors that could not be predicted” for its downward revision to China’s 2015 growth rate. These included tropical storms, a devastating explosion in the port city of Tianjin and a ‘Victory Day’ public holiday to mark the 70th anniversary of Japan’s second world war surrender.
Economic activity in Beijing, Tianjin and nearby Hebei province, which have a combined population of 110 milliob, was brought to a halt for more than a week to ensure clear skies for a Victory Day military parade.