World Bank: China's woes threaten East Asian economies
October 4, 2023
East Asia has been the center of some of the most significant and sustained economic booms of modern times. Japan, South Korea, Taiwan and, above all, China, saw their economies develop at unprecedented rates at various points from the 1950s onwards.
The region remains a hugely influential driver of the global economy. But pessimism about its prospects is rising.
In its latest outlook for the region, published earlier this week, the World Bank cut its forecast for growth in China, as well as the East Asia and Pacific region as a whole. It downgraded Chinese growth for 2024 to 4.4% from 4.8%. For the wider region, expected GDP growth is down to 4.5% from 4.8%.
"The world holds the region to a higher standard than the rest of the world," Aaditya Mattoo, chief economist of the East Asia and Pacific region for the World Bank, told DW. "It's been such a dynamic region that any slowdown attracts a lot of attention."
However, he also believes that many economies in East Asia have done well at returning to their current rates of growth so soon after the pandemic.
"Most major economies are today well above where they were before the pandemic," he said. "For example, Vietnam and China output today is 20% higher than pre-pandemic levels. But it's not just them. Even the other big countries like Malaysia, Indonesia, and the Philippines — output is as much as 10% higher than pre-pandemic levels."
China struggles to change course
Yet the economic storm clouds in China are causing concern. The world's second-largest economy accounts for the vast majority of GDP in East Asia, so its troubles loom particularly large over this region and Southeast Asia.
The World Bank points to a range of issues with the Chinese economy, from sluggish post-pandemic growth following the easing of strict lockdown policies, to a seriously troubled real estate market, to soaring household debt.
A major part of Beijing's problem, according to Mattoo, are difficulties associated with the country's leadership attempting to change China's overall economic trajectory.
"I think the past growth based on investment in infrastructure and real estate has run out of steam," he said.
He added that China's current so-called five-year plan, which runs from 2021 to 2025, has struggled to achieve its goals efficiently. China aims to boost consumption-driven growth and technological independence while also switching to greener technologies. But consumer confidence and investment have remained stubbornly low in China in the wake of the pandemic.
Louise Loo, an economist with Oxford Economics, told DW that she attributes the Chinese slowdown to three main factors: the after-effects of the strict zero-COVID policy, the state's attempts to deal with the property crisis, and an overall nervousness around investment in the private sector caused by years of regulatory crackdowns.
Global trade troubles weigh on Southeast Asia
Another factor in China's and the region's wider malaise relates to the global trade environment. In addition to subdued global demand, rising protectionism has also significantly impacted China and other export nations in Asia, particularly in Southeast Asia.
While the trade war between the US and China, which began in 2018, initially benefited countries such as Vietnam, the Philippines, Malaysia, and Thailand by redirecting trade flows, legislation from the Biden administration in the US has changed the picture.
The Inflation Reduction Act and the Chips and Science Act, aimed at boosting production within the US, have introduced various trade restrictions, and hit electronics and industrial exports to the US from countries in the region significantly.
"We seem to see that after the introduction of that legislation, the region's exports have declined," said Mattoo. "So think of this as a kind of 'treatment group' which is subject to the restrictions which require local content to be used in order to get subsidies under the Inflation Reduction Act or the Chips Act."
Another major issue for countries across the region is debt, which increased significantly during the pandemic, according to Mattoo.
"I think that debt is weighing on consumers," he said. "They're spending less. That debt is weighing on governments and the corporate sector. They're investing less. So I think that is one of our concerns which is directly attributable to the pandemic."
Economic slowdown is too fast
The importance of the region for the global economy is huge, economists say. Even after decades of historically high economic growth, its current cooling cannot simply be attributed to a natural "tapering off" said Mattoo.
Countries grow very fast when they're far away from high-income countries, he explained, because there is more range to take technologies and capital, and grow fast. Those that come closer to high-income levels, could expect a tapering off of growth.
"The problem is it's happening too early," he says. "Even today, these countries' per-capita incomes are only a fraction of the incomes of the rich countries. So to say, 'Well, this is what we would expect to happen,' is, I think, it's too fatalistic, it's not justified."
World Bank endorses reforms to services sector
So what can be done? The World Bank says reforms to the services sector can drive significant economic change in the region if governments embrace it. Mattoo pointed to restrictions on foreign ownership of businesses in several countries, and restrictions on cross-border flows of data, as well as financial and transport services.
"There is a whole range of domestic regulatory measures which are in fact impeding entry and competition in these sectors," he says.
The success of countries such as Vietnam shows how much a country's economy can grow on the back of booming services sectors, he says.
"The services sectors, we find in the last decade, have added more to regional labor productivity growth than any other sector," says Mattoo. "Even FDI [foreign direct investment] and exports in services have grown faster than FDI and exports in goods."
Edited by: Kristie Pladson