Bloomberg News - World Bank Says Asia Must Watch Inflation As Expansion Slows

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Employees perform welds on parts for Geely Automobile Holdings Ltd. Emgrand 7 series automobiles at the company's factory in Cixi, Zhejiang Province, China.

By Karl Lester M. Yap and Michael Heath - May 23, 2012 4:33 AM GMT+0200

The World Bank said policy makers in Asia’s emerging economies must guard against inflation risks and be prepared to reverse policy easing, even as slowing growth in China and Europe’s sovereign-debt turmoil hurt exports.

Growth in developing East Asia, which excludes Japan and India, will probably ease to 7.6 percent this year from 8.2 percent in 2011, the Washington-based lender said in a report today. In November, the forecast for 2012 was 7.8 percent. The region’s reliance on European demand and Chinese commodities consumption make it vulnerable to slowdowns in those markets, the World Bank said.

Asian policy makers, many of whom have cut interest rates this year, are under renewed pressure to support growth as the world grapples with the threat of a Greece exit from the euro. The Organization for Economic Cooperation and Development said yesterday Europe’s debt crisis risks spiraling and seriously damaging the global economy and Chinese Premier Wen Jiabao’s pledged this week to focus more on bolstering growth.

“Even as the region’s monetary authorities seek to advance growth with policy loosening, inflation risks cannot be overlooked,” the World Bank said in its East Asia and Pacific economic update, citing the potential for an oil-price shock. “An uptick in activity, aided by accommodative monetary policies, also poses an upside risk to inflation, so policy makers should be prepared to reverse recent easing.”

Greek Impasse

While Australia has resumed easing policy, nations from Indonesia to Thailand have paused after cutting rates early this year, before Greece’s political impasse after inconclusive elections deepened the European crisis and sent Asian currencies and stocks tumbling this month.

The MSCI Asia Pacific Index (MXAP) of stocks has fallen about 10 percent this month, as the region’s largest economies struggle with internal and external risks. China’s growth is slowing and Japan’s sovereign-rating was lowered by Fitch Ratings yesterday.

China’s shipments abroad rose less than estimated in April, while the Philippines, Thailand and Malaysia all reported export declines in March. Compounding weakening demand from Europe is the growth slowdown in China, which bought 21 percent of emerging East Asia’s exports in 2010, up from 8.8 percent in 2000, according to the World Bank.

“Exports has become more difficult, and that in part works into the slowdown in East Asia,” Bert Hofman, the World Bank’s chief economist for the East Asia and Pacific region, said in an interview with Bloomberg Television. China’s growth is forecast to slow to 8.2 percent this year from 9.2 percent 2011, and “that has its effect not just on China but also on the region because it’s harder to sell goods to China,” he said.

2013 Outlook

The World Bank expects growth in developing East Asia to accelerate to 8 percent next year, with China expanding 8.6 percent.

“On the positive side, there’s of course the recovery from the floods in Thailand which greatly contributes to the region,” Hofman said. “There is stronger growth in the Philippines, which was much affected by the Japan earthquake and tsunami. So those are the positive factors that keep growth going. And domestic demand is holding up quite nicely.”

The region has to find new sources of growth locally as over the next couple of years growth in Europe and the U.S. will be “very modest,” Hofman said.

Wen’s Pledge

Chinese Premier Wen’s pledge to focus more on bolstering growth has spurred speculation the government will step up efforts to combat a slowdown in the world’s second-largest economy. Wen called for “putting stabilizing growth in a more important position” and didn’t mention concern about inflation in remarks published May 20 by the official Xinhua News Agency. China may announce stimulus actions in the near term, according to a May 21 front-page commentary in the China Securities Journal.

“China’s government does have sufficient policy space in case things slow down a bit too rapidly,” Hofman said. “They have large fiscal space still and even on the monetary side they’ve been relaxing a little bit and they could relax a little bit further.”

China will start to slow down over the next 20 years and the 10 percent growth rates seen in recent years are going to be more difficult to achieve, he said. “We think gradually a slowdown to something like 5 percent at the end of next decade is a perfectly reasonable path.”

China’s current-account surplus, which trebled between 2003 and 2007 and topped 10.1 percent of gross domestic product in 2007, has fallen to 2.7 percent of GDP in 2011 and may stay down in the next few years as China rebalances amid weak global demand, the World Bank said in today’s report.

A current-account surplus below 3 percent of GDP suggests that the real value of the yuan is closer to equilibrium than it was in the past decade, when the country increased the flexibility in the exchange rate, it said. Still, it isn’t clear whether China’s external surplus will remain in check once global growth revives, the lender said.