Catalog

East Asia

Subregional performance

A fourth consecutive year of double-digit expansion (10.7%) in the People's Republic of China (PRC) lifted aggregate subregional growth to 8.7% (Figure 1.3.2), easily exceeding the average of the previous 5 years. Buoyant demand for East Asia's manufactured exports helped underpin the growth acceleration: subregional exports grew by 19.0% in nominal terms (the PRC's by 26.0%). Net exports contributed significantly to GDP growth in the major subregional economies. Domestic demand also grew, with private consumption picking up in the PRC; Hong Kong, China; and Korea. However, private consumption decelerated in Taipei,China because of a tightening of consumer credit. Private investment strengthened in all those economies, as well as in Mongolia, which is attracting investment into mining. With a boost from the growth in exports, the subregional current account surplus vaulted to 7.0% of GDP, double the level of 4 years earlier. Inflation was low at 1.6% as generally favorable weather helped limit food price increases.

Subregional prospects

Measures taken over the past 2 years by PRC authorities to rein in fixed asset investment are expected to bite in 2007, trimming growth in that economy to about 10%. This will bring down aggregate growth to 8.0%. All the economies in the subregion are forecast to slow, but still achieve solid growth. External demand will soften as growth rates subside in industrial nations. Domestic demand will strengthen, though, in Hong Kong, China; Korea; and Taipei,China. In the PRC, consumption demand is projected to rise, providing some counter to the targeted reduction in fixed asset investment. The subregional current account surplus will be marginally lower than 2006. Inflation will stay around 2%, assuming normal weather patterns.

Country highlights

People's Republic of China

This economy expanded at a cracking 10.7% in 2006, the fastest rate in 10 years. Industry, including manufacturing and construction, was the main contributor, but services also grew robustly. On the demand side, investment accounted for much of the growth, though net exports and consumption both made substantial contributions. Investment was driven largely by firms reinvesting profits into new industrial activity. The Government's efforts to restrain fixed asset investment pulled its growth down from about 30% in the first half of the year to 21% in the second. In particular, investment slowed sharply in industries that have built excess production capacity, such as textiles, coal mining, and electricity.

Faster growth in exports than imports boosted the trade surplus by $60 billion to $194 billion in 2006. Bilateral surpluses with the United States (US) and European Union (EU) surged, sparking trade friction and accusations of an undervalued yuan. The rising trade surplus, coupled with higher tourism receipts and interest income on the large official foreign reserves, boosted the current account surplus to 8.6% of GDP. Foreign direct investment (FDI) reached $69.5 billion and speculative capital flowed into property and stock markets. Foreign exchange reserves shot past the $1 trillion mark by year-end. In the job market, 11.8 million new jobs were created in urban areas last year, but millions of migrants from the countryside, new graduates, and laid-off workers still went without work. As a result of the excess capacity and strong competition in manufactured products, inflation moved down to 1.5%.

Steps taken to cool the economy included a raft of administrative measures to restrain investment, such as raising downpayment requirements for housing purchases to curb speculation and sending inspection teams to provinces to check if new investment projects violate land-use and environmental regulations. Market-oriented tightening included five increases in the reserve-requirement ratio for commercial banks between mid-2006 and February 2007, and three hikes in the benchmark 1-year lending rate through March 2007. These measures moderated growth in domestic credit, but actual lending and broad money increased faster than targets set by the central bank. To ease upward pressure on the yuan from the surging trade surplus and strong capital inflows, the authorities allowed the currency to appreciate by 2.4% against the US dollar between July and December, a little faster than 0.9% in the first 6 months.

In 2007, the PRC's economic growth is projected to moderate to 10.0%. Growth of industry is forecast to edge down by about 1 percentage point to 11.0% because of significant oversupply in some sectors; slower growth in investment as a result of tightening measures; and easing export growth as external markets weaken a little. Agriculture is expected to benefit from a new official emphasis on rural development and services from higher incomes, both of which should maintain growth in private consumption.

Responding to various restrictions, especially those targeted at energy use and pollution, and others curbing property speculation, fixed investment growth is forecast to decelerate to 20%. The softening in export markets and a reduction in PRC tax rebates for exports are expected to reduce the growth of merchandise exports to 18% in 2007. Import growth will ease to about 18% as investment decelerates. The large export base and the moderation in import growth suggest that the trade surplus in goods will climb to about $257 billion by 2008, and the current account surplus will increase further. Inflation will likely stay below 2% in 2007. Over the next 5 years, GDP growth is expected to average about 9%.

Hong Kong, China

This economy grew robustly by 6.8% in 2006, a third successive year of above-trend growth, though the rate decelerated from the previous 2 years. Domestic and external demand supported this performance. Closer links with the booming PRC benefited the economy in several ways: most importantly through reexports of PRC goods, and through now-substantial financial services exports to the PRC. (Services account for more than 90% of the economy's GDP.) In 2007, GDP growth is projected to come down to 5.4%, given the expected slowing in the PRC and US economies. Consumer spending is expected to strengthen on the back of generous budget givebacks announced in early 2007. Inflation is seen easing from 2.0% to 1.6% in 2007 as budget initiatives exert downward pressure on prices.

Republic of Korea

Growth accelerated to 5.0% in 2006, the fastest rate in 4 years. It was spurred by a recovery in domestic demand and strong exports, though momentum slowed over the course of the year. Private consumption posted the best rate of expansion since the credit-card crisis of 2003. The recovery broadened with a pickup in capital investment as companies invested in machinery and equipment.

This year is likely to see a continued expansion of investment in manufacturing, joined by greater housing investment. Private consumption growth, weighed down by high levels of household debt, is expected to continue, albeit at a moderate pace. However, growth in exports will ease as a consequence of the slowdown in the US. Rapidly rising imports, driven in part by demand for overseas travel and education, will halve the contribution of net exports to growth. The economy is forecast to grow by 4.5% this year, a half percentage point down from 2006. Inflation will inch up to 2.4% from 2.2%, reflecting the strengthening domestic demand.

Mongolia

This narrowly based economy depends heavily on agriculture and mining. But as the winter was mild and copper and gold prices were high in 2006, the economy performed well. GDP growth rose to 8.4%, marking the fourth straight year of 6%-plus expansion. Growth is forecast to decelerate in 2007, since mineral prices are expected to stabilize, the rate of economic expansion in the PRC (Mongolia's main export market) will be tempered, and livestock growth rates will likely slow. Inflation, which often runs at relatively high levels in this economy, receded to just over 5% in 2006, but will come in a bit higher in 2007.

Taipei,China

On the back of stronger exports, the economy accelerated in 2006, recording growth of 4.6%. Exports of optical equipment, electronics, and machinery gained from the stronger international trade environment. Domestic demand was subdued for most of the year, damped by a tightening of consumer credit that followed the bursting of a credit-card bubble in late 2005. This year, consumption and investment demand are expected to pick up, cushioning the economy from an expected slowdown in external demand. On balance, that will leave GDP growth slightly below last year's pace, at 4.3%. Inflation will remain at low levels (1.6% in 2007 compared with just 0.6% in 2006).

Development challenges

East Asia faces various challenges. In the PRC, concerned that rapid industrial and export-led growth has caused imbalances in the economy, the authorities aim to rebalance the economic structure. This will involve, on the demand side, reducing reliance on investment and exports for growth in favor of private consumption, and on the production side, a shift from industry-led growth to more emphasis on services. Planners view economic rebalancing as a social, as well as economic, objective. This policy has evolved over several years, but progress is slight: the dependence of growth on external demand is still high; the surge in investment and commercial bank lending has not yet been brought under control; and the share of gross capital formation in expenditure-based GDP rose in 2006, while that of consumption fell. Furthermore, the share of services in total GDP remains low, and actually declined in 2006. Environmental protection targets were not met, either.

On social metrics, income inequalities in the PRC have worsened and unemployment and underemployment have become serious concerns for policy makers. The Government is trying to steer policies in directions that will gradually achieve a rebalancing, while maintaining high enough rates of economic growth to absorb large numbers of people moving to the cities in search of higher living standards.

Korea faces the challenge of raising services productivity, since lagging productivity is holding back improvements in the labor market and damping consumption growth. This reflects, in part, incomplete structural reforms in services and, more broadly, in the labor market.

For its part, Taipei,China needs to nurture new sources of economic growth, given that much of its labor-intensive manufacturing has migrated to the PRC. Services firms in Taipei,China are mainly oriented toward the domestic market. The challenge is for manufacturers to move further up the value chain and for services firms to turn outward for expansion.

One challenge facing Hong Kong, China is how to broaden the tax base. It must also attend to environmental issues and an aging population. Perhaps the biggest test is to maintain the high institutional standards that support its financial services industry at a time when these services are increasingly tied to mainland companies that have operated according to different standards.

Mongolia, at an earlier stage of development than the other economies, still confronts a poverty incidence estimated at nearly one third. An important challenge is to use government revenues from mineral resources to set the country on a sustainable development path, while addressing social and environmental problems.