- Key Facts
- Board of Governors
- Board of Directors
- Departments and Offices
- Policies and Strategies
- Annual Meetings
- Independent Evaluation
- Public Sector (Sovereign) Financing
- Private Sector (Nonsovereign) Financing
- Funds and Resources
- Asian Development Fund
- Investor Information
- Business Opportunities
- Consulting Services
- ADB-Japan Scholarship Program
- News & Events
- Data & Research
- Industry and Trade
- Information and Communication Technology
- Public Sector Management
- Social Protection
- Capacity Development
- Climate Change
- Environmental Sustainability
- Gender and Development
- Poverty Reduction
- Private Sector Development
- Regional Cooperation and Integration
- Social Development
- Urban Development
- Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA)
- Central Asia Regional Economic Cooperation (CAREC)
- Greater Mekong Subregion (GMS)
- Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT)
- South Asia Subregional Economic Cooperation (SASEC)
- European Representative Office
- Japanese Representative Office [日本語]
- North American Representative Office
- Pacific Liaison and Coordination Office
- Pacific Subregional Office
Countries with Operations
- China, People's Republic of [中文]
- Cook Islands
- Kyrgyz Republic
- Lao PDR
- Marshall Islands
- Micronesia, Federated States of
- Papua New Guinea
Transcript of Press Conference for Launch of Asian Development Outlook 2010 Update
Media Relations Specialist Andrew Perrin, Moderator:
Hello and welcome to the launch of Asian Development Outlook Update 2010, one of our major reports from the Asian Development Bank in Manila. I'm Andrew Perrin from the Department of External Relations. Our report today revises our growth forecasts made earlier this year for 2010 and 2011 and includes comprehensive economic analysis for nine major economies in developing Asia, including China and India, as well as examines trends and prospects by subregion. The special theme of this year's report is The Future of Growth in Asia, a compelling theme I'm sure you'll agree. I'm very pleased to have sitting next to me today Dr. Jong-Wha Lee, the chief economist of the Asian Development Bank, to present and explain the report's major findings. Dr. Lee will make a 20-minute presentation and then be willing to respond to your questions. So without further ado let me hand over the floor to Dr. Lee.
Chief Economist Jong-Wha Lee:
Thank you and good morning. Thank you for attending this press conference for Asian Development Outlook 2010 Update.
This Asian Development Outlook is ADB's major publication providing comprehensive analysis of the 45 economies in developing Asia and the Pacific. My presentation today will focus on the economic prospects first for the global economy and then for developing Asia. After that I will discuss the special theme chapter, The Future of Growth in Asia.
After my presentation I will be very happy to take any questions that you may have.
Let me just summarize the key messages of my presentations.
Developing Asia is rebounding solidly from the global economic downturn. Growth is expected to reach 8.2% in 2010 underpinned by the rapid turnaround in export, healthy private demand, and sustained effects of expansionary fiscal and monetary policy measures. In contrast the major industrialized countries - the United States, Eurozone, and Japan - seem to be losing steam and are forecast to grow only by 2.2% this year. Weaknesses in the U.S. housing markets and the specter of Eurozone sovereign debt default and risks of commodity price spike are clouding global prospect. They are the major downside risks. A second contraction in the major industrialized economies is unlikely but cannot be ruled out completely at this moment.
As developing Asia's recovery progresses policymakers must turn their focus from managing short-term macroeconomic fluctuations during this crisis time to ensuring strong and sustained medium- and long-term growth. This will require policies that expand the region's productive capacity. We emphasize the four core elements for Asia's future growth. They include trade, human capital, infrastructure, and financial development.
So now beyond the crisis, beyond the recovery, Developing Asia must reset its priorities for achieving strong and sustainable long-term growth. I will come back to these key messages from our special chapter. But now I will begin with the global and regional outlook.
First, for the global economy, we noticed quite encouraging macroeconomic development in the first quarter of 2010. So this update actually revised based on this strong performance in the first half of this year GDP growth projection for industrial economies on average to 2.2% from April's 1.7%. So 2010 GDP growth for U.S. will be 2.8%, Eurozone 1.6%, Japan 2.5%.
But now this recovery that looked promising earlier this year is starting to run out of steam and moderation in growth is now seen for the remainder of this year. So growth in 2011 in the major industrialized economies is thus expected to be maintained at 2%.
Inflation remains subdued in the major industrialized economies. The average inflation will be 1.2% in 2010 and 1.3% in 2011. This chart shows the quarterly change in GDP growth.
Now let me just explain, there are still significant downside risks to this economic recovery in the major industrialized countries. We see continued weakness in the U.S. and Japan so their economic recovery is still frail. Shifting too quickly to fiscal and monetary tightening could heighten the risk of another contraction or an L shaped, very slow recovery. There is also danger that the Eurozone will be unable to avoid eventual default or debt restructuring by one or more of its member economies. Spikes in the commodity prices remain as another downside risk to the global economies.
In contrast to this frail recovery in the advanced economies developing Asia recovered with speed and vigor. Now the GDP growth is projected to rebound to 8.2% in 2010, as I emphasized, revised up from the earlier forecast of 7.5% in April.
However, there are growing concerns over the strength of the global economy and the sustainability of private domestic demand especially under the situation of withdrawing the government stimulus, the challenge of managing the short-term capital inflows as well as the exchange rate volatility. So 2011 growth forecast is projected to be lower than that in 2010. Now our forecast is 7.3%, it is still robust but it's lower than in 2010.
So what are the sources of this relatively resilient and strong economic growth in Asian countries? This chart shows the component of the GDP growth from the demand side. So if you look at this component actually, many countries, especially more open Southeast Asian economies, net export contributed significantly to the GDP growth in the first half of 2010. But if you look at it, in general investment and private consumption contributed strongly. So actually we see the revival of domestic demand in the Asian countries.
But if we look across Asian countries this 2010 as you can see, the 2010 growth is higher than 2009, so this recovery is more broad-based. In 2011 we'll see more moderation of the GDP growth in most of the subregions.
Let me just go through this chart. It's summarizing the major economies in terms of the GDP projections and then it shows how much we revised our GDP forecasts for 2010 and 2011 compared to the earlier forecasts we made in April.
If we look at East Asian countries in general, these five economies are now projected to rise to 8.6% in 2010. This is a slight upgrade and this is of course coming from, as I explained, strong private demand as well as favorable external environment.
South Asia's growth prospect for 2010 has been lifted to 7.8% from April's forecast.
Southeast Asia is also strongly rebounding.
Let me just show some countries. Here, the People's Republic of China (PRC), our forecast is 9.6%, we maintained the same GDP growth rate. China grew at double-digit rate in the first half of 2010, 11.1%, but the pace will ease in the second half. Our forecast is eventually 9% in third quarter and then 8% in the fourth quarter, so on average about 9.6%. Growth is projected to moderate to 9.1% in 2011.
India is experiencing a surge in economic activity. Actually the central bank started to tighten its monetary policy to control the inflation pressures. India's growth projection is raised to 8.5% in 2010 and retained at 8.7% in 2011.
In East Asia, we also raised the GDP growth for other countries in 2010. Hong Kong, 5.8%, Republic of Korea, 6%, Taipei,China 7.7%.
Pakistan's GDP is forecast at 2.5% in the fiscal year 2011 which starts from this June owing to the expansive damage from the devastating floods.
The recovery in many Southeast Asian economies is now quite strong. GDP growth in 2010 upgraded for Indonesia to 6.1%, Malaysia to 6.8%, the Philippines to 6.2%, and Singapore to 14%, Thailand to 7%, and Viet Nam to 6.7%.
One good news is that despite the recent upward movement in the food prices, inflation in developing Asia is generally within the central bank's comfort zone and is expected to be subdued and hovering at 1% in 2010 and 3.9% in 2011. But the monetary authorities will need to look out against the spikes in the global oil and food prices. And also there are variations across the subregions. The South Asia inflation forecast has been increased to 7.9% in 2010. This is mainly due to the high inflation in India because of the monsoons which increased agricultural prices in India. China will maintain stable prices, as we expect the inflation around 3.2% this year. Hong Kong we expect 2.6% inflation in 2010 and 2.8% in 2011.
Now let's go to the current account surplus. Now that domestic demand is strong, that means they import more, so actually the current account surplus is declining. We expect a little bit of decline over the next two years. But it is on average around 4% of the GDP. So this is still significant current account surplus. So this strong surplus means that progress on unwinding so-called global imbalances, strong surpluses in Asia, and oil producing countries and the current account deficit in industrial countries mostly in the US will still remain. Unwinding global imbalances has been one of the key tasks to avoid further instability in the global markets.
So I think the question is how Asia can rebalance its growth by strengthening domestic demand, but you should also have to reduce global imbalances. Actually this issue I have emphasized when I visited Hong Kong last time in April as well as last year. There has been a little bit improvement in unwinding global imbalances but still there are a lot of challenges.
Let me just go through a little bit on short-term issues in Asia especially this strong rebound in capital inflows. Now Asia is recovering much stronger and now investor risk appetite for emerging market assets now is revived. This chart shows net flows increased significantly and then many components, including the long-term as well as the short-term flows, coming back to Asia.
So the challenge is while capital flows brings benefits to the different economies, spurring investment and economic growth, the massive inflows and then the possibility of their sudden withdrawal could actually pose potential risk and lead to the financial disruption in the Asian financial markets and put pressure on the exchange rate.
So if Asian countries intervene in the foreign exchange market to avoid the exchange rate appreciation pressure, what happens is the massive liquidity is coming to the domestic financial markets so it creates another pressure on the inflation side. So this is the kind of challenge for the policymakers - how to handle these massive inflows which may continue for a while and how to manage the export competitiveness, which is still important for Asia's strong growth by handling this exchange rate appreciation pressures.
Another issue - if you look at the exchange rate appreciation numbers, Japan's yen has appreciated quite strongly because of the strong demand for safe havens during the crisis. But of course you can see quite a divergence across the region in terms of the exchange rate appreciation since September 2008 when Lehman Brothers collapsed. Of course since April 2009 the exchange rate has appreciated more but there has also been a big divergence across the region.
Often Asian countries are afraid of losing export competitiveness vis-a-vis the neighboring countries because we are also competing against each other so I think a more concerted appreciation among the Asian countries is quite a difficult task but it is important for the Asian countries.
Asian countries' accumulated sizeable foreign exchange holdings actually helped a lot especially if foreign reserves held exceeded short-term foreign exchange debt in order to maintain the financial market stability during the crisis time. These reserves have helped to maintain the domestic as well as the foreign investors' confidence and enhanced the regional economies' capacity to respond to external shocks.
But during this crisis, as you can see the reserves have also been increasing over time. That means there is a continuous intervention in the foreign exchange markets by the Asian countries. So here the PRC's reserves increased from $1.5 trillion in end-2007 to $2.4 trillion in end-June 2010.
When we get to the special topic we raised in our Asian Development Outlook Update basically what we are trying to say is that developing Asia's recovery seems to have taken a firm hold and now the global crisis has receded.
Now we need to refocus on the original agenda - how to handle the medium-term and long-term challenges. This is very important. Now we need to use this V-shaped recovery momentum to help our sustained growth. So I think this is fundamentally important. The reason why we raised this sustained growth at this moment is that we're just trying to go back to this reality - this is very important. Often we are just looking at this strong recovery and growth numbers but the reality is that the region lags far behind the industrial countries in terms of the living standards. In fact this region is the home of two thirds of the world's poor, so 1.8 billion people live on less than $2 per day. So sustaining growth is not providing the prosperity as well as reducing the poverty in the region continuously.
And the second point is now you need to look at new challenges because in the post-crisis period the global environment is less benign to Asia's pre-crisis export-led growth. We cannot continue our export-dependent development strategy for sustained growth.
So the issue is often we look at Asia's growth, we are mobilizing the resources, often we do the high savings, high investments, and then maintain the strong growth. But now the region has changed. Now we have accumulated huge capital, now we need to focus on how to use more efficiently our accumulated resources or we need to promote productive growth, it's very important. Eventually we cannot continue to accumulate the productive resources such as the labor and capital to sustain growth. Their productivity will decline and then our labor resources will also decline. So it's time to improve Asia's long-term productive capacity. So now we emphasize that the return to the long-term growth means that now we need to give a much higher priority to the structural supply policies.
Just maintaining this short-term demand management or similar measures is important when coming out of the recession but it cannot give long-term sustained growth. So developing Asia now needs to focus on the core elements of Asia's future growth that includes trade, human capital, infrastructure, and financial development. Then we'll have to strengthen the productive growth through the more efficient allocation of the productive resources and faster technological progress. This should play a big role in the region's economic growth.
Trade has been the core ingredient of the region's past success and will remain the beneficiary for both capital accumulation and productivity growth, but there are still divergences among Asian countries. East Asia is integrating further but if you look at Central Asia, South Asia they are quite behind in terms of this integration. So we need to promote further integration. Intraregional trade will give another source of the demand for Asia's exports and how to strengthen domestic demand and how to strengthen intraregional trade is important.
Another issue is because of the much weaker economies in Asia, we need to first strengthen the domestic production and diversify exports. Building up the export capacity especially in Central Asia, Pacific Islands and South Asia will help them to be linked to the regional export trade market as well as the global markets.
And then we go to the human capital. Education has been the key for Asia's growth. This has always been emphasized but looking at just aggregate number, developing Asia's 2010 on average years of schooling is about 7.9 years. But if you look at industrial countries it's 10.7 years of schooling, and then 40 years ago they were 7.5.
So even though Asia has been growing very fast in terms of educational achievement it still lags behind a lot. Looking at the more advanced countries in East Asia, Korea, Taipei,China, as well as Hong Kong improved a lot, sometimes exceeding even the average of industrial countries. If you look at Asia as a whole, China and India are still left behind. So what we should do is to continue to increase investment to improve enrollment especially in secondary and tertiary and ensure quality education. But also the education system should be reformed to meet the standards and skill set required by the labor markets. Creating jobs is important. Jobs should be matched with skill and should be matched with education.
Infrastructure is also very important. Physical infrastructure improved a lot in developing Asia. If you look at the quality of all infrastructure measures by the World Economic Forum - Singapore, Hong Kong, China, Korea - all improved a lot. But on average, still the quantity and quality of infrastructure lag behind industrial countries. We need to improve infrastructure. Especially the key challenges - rapid urbanization. Rapid urbanization means in order to keep the cities competitive and affordable investments in infrastructure need to be designed to address congestion, environmental degradation and other costs associated with urban agglomeration. And also we need to invest in the rural areas to reduce the gaps between urban and rural areas.
Developing Asia's financial systems still substantially lag the real economy and the financial systems in industrial countries. There are several measures we put here but especially the bond market measures in the bottom chart you can see that compared to the OECD many Asian countries are quite behind especially compared to the stock market development.
So the point here is Asia needs to further broaden and deepen the financial system, that's very important. But also this global crisis taught us an important lesson. Financial instability can have huge consequences for growth. Sometimes financial sectors develop a very rapid relief but they may not give the appropriate stability so it's important to strengthen the financial regulation to safeguard financial market stability.
And also bond market development especially in the local currency bond market will have to avoid so-called mismatch problems and to avoid borrowing in the foreign currency so they'd have to increase financial resilience. Another priority is to make financial services more accessible to small and medium-sized enterprises and the poor household so as to promote entrepreneurship and equality of opportunity. As I emphasize now we need to look at more efficient allocation of the productive resources as well as the faster technological progress for sustaining growth which will help to reduce the poor and ensure continued prosperity.
So these four capitals, as I emphasized - trade, infrastructure, human capital, and financial reforms - are all important and they can combine together, and with good governance and good government ability to mobilize their resources and implement policies Asia can maintain the strong growth.
Again, the key messages of the Asian Development Outlook Update 2010 is, as I emphasized, now developing Asia is rebounding solidly from the global economic downturn. Now the global recession is ending. Asia is leading the global recovery. Of course Asian countries should be justly proud of our performance, our resilience, our implementing the good policies during the crisis. Also we did a lot of good structural reforms since the Asian financial crisis. But we should not be complacent because we have still a lot of challenges to sustain growth. So policymakers must turn their focus from managing the short-term macroeconomic fluctuations to ensuring strong and sustained medium- and long-term growth.
So let me stop here. Thank you very much for listening to my presentations. If you have any questions, I'll be happy to answer them.
Q1: You have revised upwards the inflation for Hong Kong from 2.2% to 2.6% I think. Does that have anything to do with the property prices here? For the Chinese inflation, you revised it downwards, are you assuming that the renminbi won't be appreciating much? Thank you.
A1: First point, Hong Kong's inflation in the first half of the year was mostly driven by the strong demand and revival of the economy as well as the housing price increase. Actually housing price increased significantly - in 2009, 28.5%, and then this year up to now is 11.7%, is very strong growth. Of course this is also coming from Hong Kong's very high liquidity growth. I understand that the administrative authorities have strengthened their regulatory measures and then are also trying to control excess liquidity in the financial markets and we see the actual effects coming but we will see whether this will be quite effective. We take account of this type of development that is why we upgraded our CPI inflation [forecast] for Hong Kong.
PRC has maintained relatively stable inflation because China, starting from early this year, tried to control the credit growth so that helped a little bit to lower inflation, and the food price is relatively maintained at stable level. The exchange rate movement will have some impact on inflation but not too large. The renminbi appreciated about 2% since June vis-a-vis the US dollar because since June they changed the degree of exchange rate flexibility. So further appreciation a little bit will help reduce inflation pressures, but that is not really the most important issue on why we lowered inflation projections for PRC.
Q2: One of the themes that you mentioned is this flood of money into Asia, an increase in capital inflows this year and probably next year. Do you see any need for Asian governments to adjust their policy measures to ensure that once all this money has come into Asia there isn't a massive flight later perhaps and would you offer any policy prescriptions for Asian governments on how to mitigate these possible risks that might result? And just a second question, amongst the four factors that you mentioned that Asia needs to focus and sort of re-emphasize its efforts towards going forward including human capital and infrastructure, financial reforms and trade, just curious for infrastructure, we're seeing India experiencing some challenges for the Commonwealth Games at the moment and that's been an interest in contrast with China which widely seems to have much more developed and sound infrastructure focus than India. If you have any observations in that regard that would be helpful. Thank you.
A2: Thank you. On the first question, yes I emphasize that Asian countries are recovering much faster and then already started to tighten monetary policy. That means they are raising interest rates, so interest rate differentials between emerging Asia and industrialized economies will widen and also attract more capital inflows. That is why we are raising this issue, especially the massive inflows. As we mentioned there are potential risks when eventually global economies start to raise the world's interest rates and capital will flow out of the region very rapidly. That will create another threat to financial stability. This is of course a potential risk, but we're not really saying this is a big threat at this point but they are potentially the important issues.
How to handle these massive inflows is a very important issue. Of course there is no one-size-fits-all policy recommendations. We think a mix of good policies would be important and each country needs to emphasize its own more effective policies. There are policy instruments that can handle the massive inflows.
Of course there is the exchange rate flexibility - raising exchange rate could absorb the massive capital inflows to a certain extent.
Strengthening the financial regulation is also a tool that could help safeguard the financial system.
And also how to attract the capital inflows by what kind of financial instrument is also very important so you need to strengthen, as I emphasized, the local currency bond market, then basically you borrow these capital in local currency bond so you can avoid the short-term foreign currency liquidity issues when these capital inflows all of a sudden just reverse from the markets.
And then of course there will be a certain measure on capital controls that countries can use on a temporary basis and also judiciously. You don't want to impose capital control measures permanently. It can create destructive distortions. I think this is appropriate for developing Asian countries to design, to impose well designed capital control measures on a temporary basis to control the massive capital inflows.
I think these national level policies require discussion between the sending country and recipient country in a global forum to ensure coordination. This is important. For example in the G20 they are discussing how to strengthen the global safety nets, how to strengthen the IMF's role, how to strengthen surveillance, how to strengthen the financial systems - they are all relevant to the regional financial system.
We emphasize infrastructure - good quality infrastructure - is important to the sustained growth of the Asian countries. So this chart shows that some countries have good quality infrastructure but other countries are still left behind.
As we mentioned there are striking differences between the East Asian countries and South Asian countries. Also you can see for example you look at China and India there are some differences. China has a sound fiscal situation, it can mobilize government resources to build up infrastructure and also during the crisis time they mobilized massive public resources to strengthen the infrastructure.
In contrast to China's situation, India has a public deficit and public debt has increased. It's a little bit difficult to mobilize your resources to focus on good infrastructure. I'm saying it is more decentralized. So I think there are some striking differences, but we emphasize in our chapter to strengthen the cooperation between the private and public sectors to build up the good infrastructure. This will be the key agenda for the Asian countries, including the South Asian countries.
Q3: Dr. Lee, you talked about foreign exchange flexibility. May I just go into China? Obviously the argument in China is that faster appreciation of the yuan will be harmful or destabilizing to its economy and perhaps to the global economy. Now do you find that argument as having any valid grounding or would perhaps punitive tariffs such as those being pushed in the U.S. Congress or if other trading partners would also pursue such tariffs against China be more harmful to its economy?
A3: Well I think we have been saying that increasing exchange rate flexibility and greater appreciation of the Chinese renminbi would be in China's interest as well as the global interest, because for China an increase in exchange rate flexibility and greater appreciation will help to rebalance its own source of economic growth by strengthening domestic industries.
I think it can also strengthen the household consumption power. I think that's very important but of course China has changed its exchange rate policy starting from June. As I said the exchange rate has been appreciating up to about 2.1% to now since June, so there is some appreciation, but I think China has been accumulating current account surplus as well as the capital account surplus, accumulating foreign exchange reserves.
We have been saying that further increase in the exchange rate flexibility will be also good for China's interest but we don't think a rapid appreciation of the Chinese currency is good for the Chinese economy. Maintaining stability and strong growth of the Chinese economy is in everyone's interest. China contributed a lot to the global growth during this crisis time. Now the world economic engine's growth don't need to rely on only the industrial countries but China also provided a very strong engine for the economic growth.
So Chinese policy should be maintained in principle but I think further increase in the exchange rate flexibility is in China's interest. I think often these exchange rate issues were handled in the bilateral context, especially between the U.S. and China. I think this is also of interest to all the countries in the world especially in the region. This intraregional exchange rate stability is also very important to the region's economy because the region's exports are competing against each other and China is the major exporter ... So I think we should emphasize that there should be more coordination and cooperation in the regional as well as global forum to avoid any bilateral conflict and it should be handled in a multilateral context.
Q4: Developing Asian nations have now accumulated $4 trillion - this is a sign of global imbalance. You are calling for better usage of human capital and also managing capital better. How can Asia funnel these huge funds back, especially China in its own economy, to use it to develop human resource without destabilizing the economy? Can you show us how Asia can use this money?
A4: I think you got a very good point, these foreign reserves, but let me start with what I said, because having a certain amount of foreign reserves is still very important to safeguard its financial system because we do not have an international currency.
Of course ... in the current global reserve system ... the major currency is the U.S. dollar. For international transactions we still need an international currency, and then borrowing and lending is done by the international currency, so we need to have a certain amount of the international currency to safeguard our financial system.
During this crisis time actually there are a lot of evidence that shows that those countries who had higher level of the foreign reserves actually had less shocks, less significant effect on the real economy.
But how to use these accumulated resources more efficiently is more important challenge. What we are saying is that this also requires some changes in the global reserve systems but also, as China did, with the internationalization of its own currency, and this also helped to hold the foreign currency denominated reserves to higher level.
For Asia, the point is how to rechannel these huge savings within Asia to support the infrastructure, human capital investment, and also through the other productive resources to help to sustain growth would be very important.
So one issue we raised is developing the local currency bond market. This will take time but by improving the legal and regulatory structures eventually the Asian countries can invest in the local currencies in other countries especially to the small and medium enterprise. By reviving small and medium enterprises they can hire more laborers, good quality laborers, jobs.
These kinds of things we think are important. Actually the ASEAN+3 - that means the ASEAN 10 economies including China, Korea, Japan - actually did the so-called Asian Bond Market Initiative and Asian Bond Fund and these actually helped develop the Asian bond markets. That's one area.
And also there are many other areas we can promote more cooperation. I think this year APEC will be chaired by Japan and G20 will be chaired by Korea and then ASEAN+3 will be chaired by Viet Nam. In these kinds of regional and global forums I think the one big issue is how to reduce the development gaps and then how to promote the more stable and stronger economic growth in the region. And so I think that kind of discussion should be important.
Q5: Dr. Lee I have a few questions on China and Hong Kong economy. You did mention that China's CPI's, the inflation is not as high as you have expected. So do you think China is likely to raise interest rate in the near future? If not then when will that be happening? Second is about the property tax. You mentioned in your press release that China should introduce a property tax. Can you elaborate a little bit more about this and what is the rationale behind this? And the third question is about the Hong Kong property market. Should the Chief Executive introduce more measures to curb property investment in the city? Thanks very much.
A5: Chinese monetary authorities have implemented monetary tightening measures especially withdrawing the excess liquidity from the financial system and I'm sure they will eventually raise the policy rates but it is very hard to predict the timing and the extent. Sometimes the monetary policies are not only based on the inflationary pressures but also look at the real economy as well as the other indicators, especially the financial indicators. That eventually will come but it is very hard to predict.
On the property tax, we discussed in our PRC Chapter that basically what we have been raising is that rebalancing is very important for sustained growth for China. I think you cannot really delay implementing the rebalanced measures to the future because this might be the right timing.
As I said the global environment is not very benign. And if you look at consumption, especially the consumption share to GDP, China is still very low and now how to strengthen household consumption will be very important. It cannot be done by just government stimulus measures. It requires some kind of structural adjustment. So one instrument we raised in the discussion is ... fiscal policy as a tool for rebalancing.
So there are several measures. Of course fiscal spending in the education, and the pensions, and also the health sector, the housing especially the poor households will require rebalancing the economic growth because it will reduce the precautionary savings by households but also the strengthening automatic stabilizers especially how to support the people who have very low wages but is very vulnerable to the external shocks.
China's issue is how local governments can implement appropriate policies to rebalance the economy. This is key because the local governments do not have the financial resources to finance its own economic policies. This is one particular issue in China. Of course you can argue that strengthening transfer resources from the central government to the local government is one way. But maybe another way is also strengthen local governments' own financial resources.
In that context we raised the issue of changing the tax system to give financial resources to the local government. Currently as you know the local government is borrowing to set up a separate investment vehicle to finance infrastructure. This is not really the way that they can implement the continuously appropriate structure for long-term policies.
So we raised this property tax issue that maybe this will help local governments because the local government just use land sale to finance its resources. Maybe this property tax is one way. Another important issue is the property tax will help a little bit to control the recent hike in property prices. In that context the property tax can be used again to provide some resources to the local government as well as tame the property price hike.
Hong Kong's property prices as I said increased very rapidly and then now it is going back to the pre-1997 crisis level. The sharp price increase led to discussions on whether this is really overheating symptom and if this has created property bubbles. Property bubbles are always very hard to measure but I think there is clearly increasing risk of overheating in Hong Kong's economy. So as I said the Hong Kong authorities have been aware of this risk and then have implemented some regulatory measures. So we hope these regulatory measures will be more effective and if they didn't work they may need to design another regulatory measure to address this property price increase.
Q6: Dr. Lee I want to ask about the issue of domestic demand and regional trade which came up earlier in the report. To what will those two factors in the long term replace or make up for if you will any softening, any permanent softening, in trade with the West and if that is in fact at all realistic what kind of timeline might we be looking at for that? Thank you.
A6: We're just saying the global environment is less benign, but having said, global trade is very important for Asia's exporters and its major markets come from the industrial countries.
Also, it's not just looking at the share of the trade, we should also look at the trade structure. A lot of the trade among the Asian countries concentrates on the parts and components, especially China, which assembles its parts and components to produce the final goods and then export to the major industrial countries. This will continue. I think these major markets are still important.
What we are saying is more balanced structure of the trade. Changing the focus from the global markets to the regional markets by strengthening the domestic demand and regional demand can gradually compensate for this less benign global environment and provide another source of growth to a certain extent even though it can never replace completely the global markets.
I think this is the important issue. Actually what we have in the report, what we have emphasized is if you look at East Asia's, I will just focus on East Asia, out of East Asia's total exports actually only about 54% is going to the major industrial countries. But if you look at final demand, more than 70% is going to industrialized countries, so we are hugely dependent on industrial countries.
Having said that, your question is eventually what will happen to Asia? I think we need to focus on this rapid evolution of the large markets in Asia and as people become richer and richer they can demand more durable goods, especially consumer durables. We had another publication we launched in New Delhi last August which focused on the role of Asia's middle class. The middle class actually provided a significant market for the consumer durables. The middle class could play a significant role of providing the markets for the Asian countries for the next two decades.
This Asian Development Outlook Update is not really focusing on any projections, especially these market issues, but what we have said here is the Asian countries' growth rates will eventually become gradually slower over time but still Asia will play a very significant role in terms of the share in the global economies' global output and consumption. In the long term I think I have no doubt that Asia's own market will play a much larger role for the Asian export because this share of final goods demand would increase eventually in the Asian countries.
Q7: How do you think the renminbi appreciation will affect Chinese exports? What is the range for the appreciation that won't affect the export industry?
A7: As long as the renminbi appreciation is gradual I don't think it will have a huge impact on China's trade balance. China's export competitiveness in certain labor intensive products depends on the low wage and also on the undervalued exchange rate. But I think China's export competitiveness has been improving a lot over time so I don't think it will hurt a lot. Also the trade balance will be determined by the other structural capitals.
So this appreciation especially vis-a-vis the US dollar may not have a significant impact. As you can see, one example was what happened to Japan in 1985, since the Plaza Accord Japan's yen dramatically appreciated over time but the country still maintained a strong current account surplus, so basically that explains this current account is based on more structural capitals rather than exchange rate. But having said that also the important issue is how the export industry can accumulate the profit and can create the jobs continuously. This is also a very important issue. That's why I said the exchange rate appreciation should be gradual, not an abrupt adjustment in exchange rate.
As Premier Wen said sudden appreciation like 20% may hurt the export industries quite a lot and may have to support the export industries. So it should be gradually appreciated. China's case is that currently we all understand the export sector plays a major role in creating the jobs especially for the young people so they need to continue.
But as I said eventually because China's growth rate is very high and if they don't appreciate the nominal exchange rate inflation will be higher so eventually the real exchange rate will be appreciated, so the trade balance will decline. This is what happened to the many previous Asian exporters, Asian tigers. So I think this gradual appreciation makes sense for China.
Q8: Will that have a huge impact on the trade balance in China?
A8: The current account balance is basically the trade balance including the other factors, but it has been declining a little bit. So I think gradual change in the exchange rate will not have a huge impact on the trade balance.
Q9: Defense spending in developing Asian economies is going up very fast. Do you think it will reach levels where it saps money out from your agendas so it could potentially derail growth in the region?
A9: I think for the long-term development the financing is important, the financing could come from the public sector as well as the private sector. So how to allocate resources appropriately by the government is one issue, but also how to mobilize the private resources from the domestic investors as well as the foreign investors would be a very important issue.
So it's not really just focused on one issue but in general I think it's the development expenditure. It's not a call just for Asia but for the world that maybe we are spending too much for defense ... basically we need to spend more on development to help the poor people. I think this should be clear. Thank you.
Thank you very much to all of you for coming along today for the launch of the Asian Development Outlook Update. The report is on a CD-ROM in your folders and can also be accessed and downloaded from our website, adb.org. Thank you.