China slowdown to impact on Asia-Pacific

Asian policymakers should prepare their economies for the continued slowdown of the Chinese economy, which represents one of the most direct threats to the region’s prospects in the medium term.

The International Monetary Fund (IMF) said changes in the Chinese economy’s structure were the most important shift influencing the global economy. China’s Asian neighbors would be among the first to feel the tremors.

“Spillovers from this transition could affect each of your countries, your markets and your business communities,” IMF Deputy Managing Director Mitsuhiro Furusawa said in Manila.

Delivering a speech before the Southeast Asian Central Bankers (Seacen) Governors’ Conference, which was last held in the country in 2003, the senior Fund executive warned of clouds of risk that could cast shadows on the region’s otherwise bright prospects.

IMF estimates showed that every one percentage point slowdown in Chinese growth would shave off three-tenths of a point away from other Asian economies’ rate of expansion.

After growing by 7.3 percent in 2014, China’s economy—Asia’s biggest—would expand by 6.8 percent this year, before slowing further to 6.3 percent in 2016, according to IMF projections.

The rest of Asia is expected to grow by a more modest 5.4 percent this year and the next, while global output is seen rising 3.1 percent in 3.6 percent, respectively.

Much of the slowdown is tied to Beijing’s decision to replace debt-financed investment and manufacturing with domestic consumption as the Chinese economy’s main economic foundation.

Tied to this change in direction was the Chinese central bank’s recent decision to loosen the yuan’s peg to the dollar—viewed as a necessary reform to expand the clout of market forces.

“And all of this has been magnified by falling commodity prices and interest rate uncertainty. The magnitude of the spillovers from China took markets, businesses and policy makers by surprise,” Furusawa said.

To further protect economies from China’s change, which are made worse by interest rates rising from record lows, Furusawa said Asia-Pacific economies should address potential vulnerabilities before they become weaknesses. For instance, high levels of corporate debt could “amplify shocks,” he said.

“It is important to strengthen supervisory and regulatory frameworks. Enhanced monitoring of corporate sector would also be useful,” he added.