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Economic Outlooks — Asia Pacific Economic Outlook, June 2013

Economic Outlooks — Asia Pacific Economic Outlook, June 2013

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Published by: Deloitte University Press on Jun 19, 2013
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Asia PacifcEconomicOutlook
June 2013
ChinaJapanSouth KoreaTaiwan
ast can China grow? Tat is the ques-tion underlying much o the discussion aboutChina’s economy these days. Clearly, double-digit growth is not in the cards and may evenbe a thing o the past. Growth o 7.7 percent inthe rst quarter was considered disappointing,and, until recently, many analysts were expectinggrowth to revert to the range o 8–9 percent. Yetnow the government appears determined to resetexpectations. Te government has orecast thatgrowth this year will be 7.5 percent, a good deallower than many private analysts had orecast only recently. Tat is certainly slower than the 7.8 per-cent growth in 2012, which was the slowest rate o growth in 13 years.Premier Li Keqiang, in a recent speech inGermany, said that growth or the remaindero the decade will average an even lower 7.0percent per year. Although ar slower than thegrowth experienced during the past two decades,Li indicated that China is entering a range o reasonable growth.” Given that China has becomea more mature economy with a declining labororce, Li is probably correct in setting more mod-est expectations. Moreover, growth o 7.0 percentis not bad: It doubles the GDP in 10 years. Li saidthat a combination o industrialization, urbaniza-tion, improvements in agricultural productivity,and investments in technology can contributeto healthy growth, and that this requires moremarket-oriented reorms. He also said that “or a very big economy, this is not easy.When and how such reorms will be imple-mented remains uncertain. While some reormshave been announced, many government state-ments have been relatively vague. With a new regime just installed, it could take some time tobuild the support necessary to implement much-needed reorms. In the interim, China acessome risks, including the ramications o large
By Dr. Ira Kalish
Aa Pacfc Ecmc olk—Je 2013
local government debt, considerable leverage inthe shadow banking system, and weaker-than-expected manuacturing activity. Manuacturingweakness stems rom weakness in export markets.In addition, rising wages in China are havingan adverse impact on export competitiveness,thereby leading to an exodus o manuacturingcapacity. Tus, even growth in the range o 7–8percent cannot be guaranteed.
Financial market reorms
One area o reorm in which the governmenthas begun to take action involves the nancial sys-tem. Indeed, China appears to be on the verge o implementing signicant reorms. A report romthe central bank says that there is consensus thatnow is the time to introduce deposit insurance tothe banking system. Analysts say that this bodeswell or introducing liberalization o interest rates.Free movement o interest rates would eliminatethe automatic nature o bank protability thatnow exists under interest rate controls, which putsbank capital, and consequently deposits, at risk—hence the need or deposit insurance.Freer interest-rate movement will be critical toeliminating some o the imbalances in the Chineseeconomy. Government-controlled interest ratesmean that unds are not necessarily channeled tothe most protable uses. As such, currently thereis oen excessive and ineective investment, notto mention incentives or excessive risk takingthat puts the entire system at risk. Low interestrates have probably contributed to the property price bubble in China as well. Freer interest ratesalso would help reduce the demand or shadow banking services, which also create risks to theeconomy. Indeed, the central bank report calledor greater supervision o such activities. Why isthis so important?Chinas shadow banking system could pose asystemic risk to Chinas nancial system. In China,ormal banks ace interest rate regulations, bothon deposits and loans. Tis restricts the supply o credit and channels most such credit to state-run companies. However, tens o thousands o non-bank entities have been established in orderto operate outside interest rate controls. Somesuch entities, part o the shadow banking system,are operated o-balance-sheet by banks. Tey areunded not by deposits but by the wholesale mar-ket. Tey oer high-interest loans to businesses,households, and local governments. Teir mas-sive activity is unregulated, unsupervised, and nottransparent. Part o the problem is that, althoughthe ormal banking system has a non-perormingloan (NPL) ratio o only 1 percent, this numberlacks meaning when an estimated 36 percent o credit is extended by non-banks—and their NPLratio is unknown. Te risk is that ormal banks,which have provided wholesale unding or theshadow banking system, could ace big losses.Already there have been some deaults. Ultimately,it would be more eective or interest rate controlsto be abandoned. Tis would eliminate the needor shadow banks and lead to a more ecientsystem o nancial intermediation.Based on what many government ocials havesaid, there is much to do on the nancial ront.Implementation o deposit insurance would cer-tainly be an important rst step.
Premier Li Keqiang, in a recent speech in Germany, saidthat growth or the remainder o the decade will averagean even lower 7.0 percent per year.
Aa Pacfc Ecmc olk—Je 2013

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