China has booster effect on growth in East Asia

East Asia, led by China, has emerged stronger after the financial crisis, but a continuation of structural reform is needed to maintain the growth momentum, finds the World Bank.

On the back of a recovery in demand, ongoing stimulus in developing East Asia and a rebound in consumer spending, the World Bank has raised its projection for real GDP growth for the region in 2010 to 8.7%, almost one percentage point higher than its forecast in November 2009. The research is part of the World Bank's latest East Asia & Pacific Economic Update, a biannual assessment of the economies in the region, which was released yesterday.

The World Bank attributes East Asia's "remarkable recovery" primarily to: a large and timely policy stimulus; renewed inventory restocking; the return of buoyant demand abroad and improving consumer sentiment. Also contributing, it said, are solid economic fundamentals, including high foreign exchange reserves; well-capitalised banks; and modest levels of household, corporate and government debt.

The World Bank estimates that growth in the region slowed to 7% in 2009 from 8.5% in 2008, and notes that the reason why the slowdown wasn't more pronounced was because China maintained its growth momentum. According to the report, China's GDP growth slowed to 8.7% in 2009 from 9.6% in 2008. 

Excluding China, the East Asia region, to which the World Bank counts Indonesia, Malaysia, the Philippines, Thailand, Vietnam, Cambodia, Laos, Timor-Leste, Mongolia, Fiji and Papua New Guinea, grew at only 1.3% in 2009. In China, private consumption made a significant contribution to growth and the World Bank expects this trend to continue. China also led the region with regard to the rebound in industrial production.

As an indication of the pace of domestic demand, the World Bank notes that automobile sales in China, Korea, Thailand and the Philippines increased by more than 20% year-on-year in late 2009 to record highs.

Exports have recovered to pre-crisis levels in China and Indonesia, finds the World Bank. The recovery in China was driven by demand from outside East Asia, and despite a contraction in export demand in 2009 China last year overtook Germany as the world's largest exporter. In Malaysia, the Philippines and Thailand exports are still off from pre-crisis peaks reached in July 2008 and the recovery is driven by regional demand.

"The 'new normal' will be characterised by slower growth in developed countries, tighter global financial conditions, rising concerns about developed countries' debt levels, and a more difficult environment for global trade," said Vikram Nehru, World Bank chief economist for the East Asia Pacific region, in a written statement while releasing the findings. "In that setting, the developing countries of East Asia will need to carefully manage the withdrawal of fiscal stimulus measures in the short term while returning to their structural reform agendas to promote growth in the long term."

The focus on structural reform means different things to different countries, the report goes on to say. For China, it means rebalancing the economy, including a larger role for the services sector and private consumption, and moving away from investment-heavy, export-led growth. It also means encouraging environmental sustainability.

For the region's middle-income countries -- Vietnam, the Philippines, Indonesia, Malaysia and Thailand -- the priority is investing in physical and human capital to move up the value chain in production and exports. Low-income countries, like Cambodia and Laos, need to focus on breaking into manufacturing and becoming part of global and regional production networks. 

The World Bank also highlighted that the crisis did slow the pace of poverty reduction in the region and that 14 million more people will be in poverty in 2010 due to the crisis. Taking the Philippines as an example, the World Bank finds that the crisis increased the poverty rate by as much as 2%. 

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