Bold Actions Required in Developing Asia to Overcome Impact of PRC'S Growth - ADB Study

The continued moderation of growth in the People's Republic of China (PRC) could knock off a third of a percentage point a year in growth for the rest of developing Asia over the next 2 years. Bold actions from policymakers in the region, including structural reforms to attract new investment, are needed to counteract the slowdown, a new Asian Development Bank (ADB) policy brief says.

The gradual slowdown in the PRC economy, driven by demographic factors, higher labor costs, external demand weakness, and a gradual shift towards consumption-led growth, will continue into the medium-term, said Shang-Jin Wei, ADB's Chief Economist. While this will have a negative knock-on effect for many other economies in the region, others can also benefit from Chinese households' increased willingness and ability to consume and a shift to a more service-oriented economy in the PRC.

The ADB brief, Moderating Growth and Structural Change in the People's Republic of China, estimates that a continued gradual slowdown in PRC growth, as seen since 2011, is the most likely scenario. This would reduce growth in developing Asian countries by a third of a percentage point per year compared to if there were no slowdown in PRC growth.

A steep drop in growth in the PRC is not a high probability risk in either the short- or medium-term, as the PRC still has a number of policy options to offset shocks, the ADB study says. If a much-worse-than-expected scenario should materialize, it could translate into a 1.8% decline in the rest of developing Asia's growth.

Weaker demand for commodities by the PRC will hurt commodity exporters, who are already under pressure from a slump in prices, driving home the need for market diversification in these economies. At the same time, the study notes that while the softer PRC economy has affected commodity prices, the impact has varied widely across commodities, with PRC growth affecting coal and metal prices more than oil and natural gas. Economies with strong trade and production linkages with PRC will also be more affected. These include Hong Kong, China; Malaysia; Republic of Korea; and Taipei,China.

The ADB brief notes that a number of Asian economies can benefit from the moderating growth and structural changes in the PRC economy. Countries as diverse as Bangladesh, Cambodia, India, Myanmar and Viet Nam may see growth in industrial activity as the PRC withdraws from low-end segments of the manufacturing sector, including garments. In addition, countries and companies able to tap the steadily rising demand for goods and services by PRC consumers will also be in a good position going forward. Countries will need to continue to pursue bold economic reforms to attract new investments in these areas.

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