As the largest economy in emerging East Asia, China has avoided the worst effects of the global downturn, growing a robust 7.1 percent in the first half of the year. This has led many to believe that the country will help ignite economic recovery across the region.
To achieve this, China's economy must continue its strong growth. And there are "good reasons" to believe it will, according to the latest study of the Asian Development Bank (ADB).
Like other emerging East Asian economies, China's exports have fallen drastically. But the country's massive fiscal stimulus package appears to have countered this external demand shock, ADB said in its latest Asia Economic Monitor, a semiannual review of emerging East Asia's growth and policy issues. The report covers China, South Korea and the ten members of the Association of Southeast Asian Nations.
China is implementing a sizable fiscal stimulus package announced in November 2008. As a result of the 2-year stimulus package worth 4 trillion yuan (586 billion U.S. dollars), China's fiscal deficit is expected to rise from 0.4 percent of its gross domestic product (GDP) in 2008 to 3.0 percent in 2009. This may be the highest since 1979, but remains low compared with deficits in much of the rest of emerging East Asia.
The fiscal stimulus is credited with helping China's economy maintain growth amid a collapse in exports. The 6.1 percent GDP growth in the first quarter of 2009 was the lowest since the introduction of quarterly GDP figures in the fourth quarter of 1999. But growth performance improved in the second quarter, increasing by 7.9 percent.
Along with fiscal stimulus, there has also been substantial monetary easing leading to a surge in new lending. Together, these measures suggest that robust economic growth in China will continue, at least in the short term, ADB said.
Unlike most developed countries, China has been able to get its banks to ramp up lending. In the first quarter alone, new bank lending exceeded last year's total. This is good for the economy and economic activity, so long as it stays manageable, said Lei Lei Song, economist with ADB's Office of Regional Economic Integration.
It is likely that China will recover ahead of other emerging East Asian economies, reaching its targeted growth rate of 8.0 percent, said the economist.
China can serve as a huge market for emerging East Asian exports. The share of emerging East Asia's exports to the Chinese mainland and to Hong Kong has been rising over the years. Exports to Hong Kong are frequently bound for factories in the Chinese mainland.
With most advanced economies in recession, China is one of the few large economies still growing. Recent trends show that while exports from Indonesia, Malaysia, and the Philippines among others to the United States have continued falling, those to the Chinese mainland and Hong Kong have started increasing.
However, there is a limit to what China can do by itself, said the ADB economist. During the first six months of 2009, China's total exports have dropped 21.8 percent. But imports fell faster, at 25.4 percent as a substantial portion of China's imports include intermediate goods for further processing into final exports to other countries. "As global demand for its exports fell, China's imports fell further," Song said.
According to the ADB report, 60 percent of Asian exports' final destination is the G3 -- European Union, the United States, and Japan -- compared with 32 percent in terms of direct trade. This suggests that the advanced economies remain the primary destination of Asian exports, if one includes trade in intermediate goods within the region.
Given that China's demand for imports from emerging East Asia depends on its ability to export, without a recovery in global demand, China cannot be expected to be the major driver for the region's recovery, Song said during an interview with Xinhua.
In addition, China exports many of the same manufactured goods - - such as electronics and garments -- that other emerging East Asian economies export, which made it hard for exporters to enter Chinese markets if factories there shift production to domestic markets instead of concentrating on export markets.
This means that economies whose products do not directly compete with China's exports will do better. The Republic of Korea, which produce high-tech products, will likely benefit. But economies such as Malaysia and Thailand, which produce goods similar in technological development to the Chinese mainland, will find it difficult to crack the market, ADB said.
Additionally, prices obtained for exports from emerging East Asian economies in China will be lower than these in G3 economies.
Another reason that China's growth may not help the regional economies much is that the fiscal stimulus spending currently driving China's growth is mostly focused on improving infrastructure, said the ADB report.
While infrastructure spending will help boost construction and imports of raw materials, it is unlikely to help increase much of the demand for goods that other emerging East Asian economies export, it added. The local authorities that are implementing infrastructure projects are also eager to ensure that stimulus benefits local producers.
China has a lot of money to invest, ADB said. Emerging East Asian economies could benefit if the country looks for investment opportunities within the region. So far, however, China has focused its investment in raw material production or advanced technology. Thus, regional economies may not benefit that much from China's foreign investment in the region.
The Chinese economy looks set for a quick recovery. This will provide a much-needed boost to the region's economies.
Nevertheless, despite its growing importance to the region, China cannot be the sole driver for the region's recovery. Europe, the United States, and Japan -- accounting for 59.1 percent of emerging East Asia's total -- remain the most important sources of demand for the region's exports, ADB said.
(Xinhua News Agency July 23, 2009)
