Lack of Chinese Slowdown Just Fine by Asia: William Pesek Jr.
May 2 (Bloomberg) -- A Philippine beach isn't the first place you'd look for clues about the trajectory of Asia's economies. Yet here on the island of Boracay, there are myriad ones -- many of Chinese origin.
The reference here is to tourists. With cash to spend, China's rapidly expanding middle class is filling more and more Asian airplanes and hotel rooms. It's one of the most graphic manifestations of how China's rise is changing the economic face of Asia -- from the biggest cities to the tiniest islands like this one a one-hour flight south of Manila.
``It's amazing really,'' says 31-year-old scuba instructor Ian Buenaventura. ``Two years ago, this island rarely, if ever, saw mainland Chinese tourists. Now, very often they make up the majority of the divers I take out.''
Yes, China's failure to slow its booming economy is just fine by many Asians. Fourteen years after Japan, this region's traditional growth engine, fell on its back and seven years after the Asian crisis, China's 9-percent growth is the equivalent of answered prayers.
It's a mixed blessing, though. Asia risks becoming too dependent on a developing economy facing huge risks including overheating. If Asia's No. 2 economy gets into trouble in the next couple of years -- which is quite possible -- the region's outlook would darken significantly.
Confounding Expectations
The World Bank raised its 2005 growth forecast for East Asia to 6 percent from a November estimate of 5.9 percent, citing China's expansion. It's helping sustain demand for mobile-phone parts here in the Philippines, computer chips from South Korea and palm oil from Indonesia at a time when high oil prices curb spending in the U.S., Japan and Europe.
China, quite simply, continues to drive Asian growth, confounding all expectations that Beijing would slow the economy to avoid inflation. Now, there's even heightened speculation China is ready to alter its currency policy.
Markets are buzzing about an article in the state-sponsored China Securities Journal indicating that the government may let its currency trade more freely at any time. On April 29, JPMorgan Chase & Co. chief China economist Frank Gong predicted China may loosen the yuan's 8.3 peg to the dollar this week.
Letting the yuan rise would increase the purchasing power of Chinese consumers, enabling them to buy more imports and visit more of Asia's white-sand beaches, pumping tourist dollars into economies increasingly reliant on the industry. It would make it harder for China to cut prices of its exports, reducing the need for Asian central banks to weaken currencies to help exporters.
Social Instability
A revaluation could still be a way off. China's underlying financial system remains awash in hundreds of billions of dollars of bad loans. Also, there's no guarantee China won't experience social instability thanks to the rising gap between rich and poor.
Yet Chinese overheating remains a clear and present danger for Asia. One risk is that the growing reliance on Chinese growth will leave the region complacent. After its 1997-1998 crisis, Asia reduced the role of exports and worked to boost domestic demand. In the last two years, though, strong Chinese demand took pressure off governments to retool economies.
If China overheats, efforts to cool things down will hit Asia hard. And for better or worse, China seems keen on rolling the dice and letting things zoom ahead. Putting fast growth in the short run above inflation risks could backfire and cause considerable instability. The rest of the world has little choice but to hope for the best.
Global Economy
Just as the U.S. effectively says ``it's our dollar, your problem,'' China is saying ``it's our economy, your problem.'' Of course, if the dollar crashed under the weight of record U.S. current-account and budget deficits, or China experienced a hard landing, the entire global economy would pay the price.
China's economy, which accounted for a tenth of global growth in 2004, grew 9.5 percent in the first quarter, matching the fourth quarter's gain. That has economists like David Cohen of Action Economics predicting the central bank will raise its benchmark one-year lending rate 50 basis points by year-end.
On April 14, Premier Wen Jiabao said raw materials prices are still rising too quickly and that curbs on lending and investment imposed last year will stay in place to cool inflation. Considering the 5.6 percent rise in producer-price inflation in March, one wonders if more drastic measures aren't necessary.
``The risk of another economically painful and socio- politically destabilizing hard landing is still high,'' economists Nouriel Roubini of New York University and Brad Setser of University College, Oxford wrote in a recent report. ``China's existing growth model looks to be running up against real limits, both internally and globally.''
More aggressive efforts to slow growth may slam Asian economies in the short run, but may help them in the longer run. China could become the growth anchor Japan was in the 1970s and 1980s, so long as it avoids a meltdown.
It's not in Asia's best interest to see China's boom turn into a bust. If that were to happen, it certainly wouldn't be a day at the beach for the Chinese, or anyone else in Asia.
To contact the writer of this column:
William Pesek Jr. in Boracay, Philippines, reachable through the
Tokyo newsroom at wpesek@bloomberg.net
Last Updated: May 1, 2005 12:05 EDT
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