Bold actions from the policymakers of developing Asia, including structural reforms to attract new investment, are needed to counteract the slowdown in China’s economic growth, a new Asian Development Bank (ADB) policy brief says.
The continued moderation of growth in China could knock off a third of a percentage point a year in growth for the rest of developing Asia over the next two years.
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.
“The gradual slowdown in the PRC economy, driven by demographic factors, higher labour costs, external demand weakness, and a gradual shift towards consumption-led growth, will continue into the medium-term,” said ADB Chief Economist Shang-Jin Wei.
According to an ADB press statement, Wei said that while this would 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.
This slowdown 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 China is not a high probability risk in either the short- or medium-term, as the country still has a number of policy options to offset shocks, the ADB study says.
If a much-worse-than-expected scenario should materialise, it could translate into a 1.8% decline in the rest of developing Asia’s growth.
Weaker demand for commodities by China 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 Chinese economy has affected commodity prices, the impact has varied widely across commodities, with 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.
The ADB brief notes that a number of Asian economies can benefit from the moderating growth and structural changes in China’s economy.
