China slowdown hits Asian growth hopes

Slowing growth in China is affecting Asia's regional outlook.

Story highlights

  • Slowing growth in China and India has hit prospects across the rest of Asia
  • Asian Development Bank to make the biggest cut in growth forecast since 2008
  • Bank cut forecast by almost a full percentage point to 6.1% for 2012

Slowing growth in China and India has hit prospects across the rest of Asia and led the Asian Development Bank to make the biggest cut in its regional economic growth forecast since 2008, according to its chief economist.

The bank cut this year's forecast for Asian gross domestic product growth by almost a full percentage point to 6.1 per cent, down from the 6.9 per cent predicted when it last issued a 2012 outlook in April this year.

Changyong Rhee, the ADB's chief economist, said that China and India could not just blame external factors such as the crisis in the eurozone and slower economies in other big import markets for their own slowdown.

"In the PRC, the investment slowdown and the end of the real estate boom are big factors, and that is healthy," he said. "In India, it is the failure to push through promised reforms that is harming growth."

While China attracts more global attention, it is India that is seeing the far more drastic deceleration, according to the ADB, which slashed its forecast for the southern-Asian nation by 1.4 percentage points to 5.6 per cent.

The cuts to the ADB forecasts come in the thick of a welter of downgrades from investment banks and other agencies. Standard & Poor's and the Indian credit rating agency CRISIL, both cut their Indian forecasts to 5.5 per cent growth for this year last week, while banks including Barclays and Goldman Sachs, cut forecasts for China to 7.5 per cent and 7.6 per cent respectively last month.

South-east Asia remains much more resilient, Mr Rhee said, with Malaysia and the Philippines seeing upgrades to their forecast for the year in spite of a heavy reliance on exports for Malaysia in particular.

"As a whole, [south-east Asian] countries are becoming much more competitive with China," Mr Rhee said. "This is partly due to reforms undertaken after the Asian financial crisis and partly due to rising labour costs in China."

But overall, the slower level of growth in Asia was healthy, but needed to be made more sustainable, Mr Rhee said.

"China and other Asian countries should worry less about quantity and more about quality of growth," he said. "That's why we are focusing on the structural changes that are needed and on supporting the service sector in particular."

The ADB wants countries in the region to cut red-tape on the service sector and launch a wave of deregulation to support its development.

The sector contributed only about 25 per cent of employment in India, while in China services accounted for about 35 per cent, according to the ADB. This compares to levels close to 50 per cent in countries such as Azerbaijan, the Philippines and Kazakhstan, or levels of about 80 per cent in the US and UK.

"Most of the service sector is run by the state across Asia, so there is little interest within the sector to deregulate," he said. "But we are not saying countries have to open up their markets to foreign businesses, what we are focusing on is that there is not even any competition at all domestically. Asian countries can also learn a lot of lessons from the mistakes made with deregulation in western countries."