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Asia can withstand Europe impact: World Bank

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Bloomberg Singapore

The World Bank said China is heading for a soft landing of growth in excess of eight per cent next year, and with most Asian nations has fiscal scope to cushion its economy from an escalation in Europe's debt crisis.

Developing East Asia, which excludes Japan, Hong Kong, Taiwan, South Korea, Singapore and India, will see its expansion moderate to 7.8 per cent in 2012 from 8.2 per cent this year, the Washington-based development lender said in a semiannual report on Tuesday. While China faces the risk of a "strong" impact from a real-estate correction, its gross domestic product will rise 8.4 per cent next year and about that pace thereafter, the bank said.

 

The report signals that Asia, which led the world out of the 2008-2009 recession, is poised to withstand the blows from any slump in demand for its exports or pull-back in credit by European banks. The World Bank said countries with high investment rates, such as China, should focus on boosting consumer spending in any fiscal stimulus, such as with social security and pension provision.

"Clearly the region is being affected by Europe and the global environment has weakened," Bert Hofman, the World Bank's chief economist for the East Asia and Pacific region, said in an interview with Bloomberg Television. At the same time, "imports into China are holding up quite nicely and it is becoming increasingly a market for consumption goods of manufacturing countries in the region."

Stocks Drop
Asian stocks have retreated amid concern that the region's export-reliant economies will suffer the impact of diminished global demand as the euro region struggles to stem its debt crisis. The MSCI Asia Pacific Index dropped 0.7 per cent as of 1.02 pm Tokyo time, heading for a sixth straight day of declines.

In other economic releases on Tuesday, Taiwan may report that its unemployment rate held near a three-year low in October. The level is forecast at 4.3 per cent, according to the median estimate of 10 economists surveyed by Bloomberg News, compared with 4.27 per cent in September. The data are scheduled around 4 pm Taipei time. Hong Kong is projected to say inflation dipped to an annual rate of 5.7 per cent last month, from 5.8 per cent.

The US Commerce Department may say on Tuesday the economy expanded at a 2.5 per cent annualised rate in the third quarter, the same as the government's prior estimate, according to the Bloomberg survey median of 81 estimates. Mexico's economic growth probably accelerated last quarter, with GDP climbing 3.9 per cent from a year earlier, a separate report may show.

Canada Consumers
Canadian retail sales probably rose 0.5 per cent in September from August, economists surveyed by Bloomberg News predict ahead of a Statistics Canada report on Tuesday.

The World Bank's growth projection for developing East Asia in 2011 was unchanged from a March estimate. For next year, the lender said in March that growth would be around eight per cent.

Asian policymakers have shifted their focus to shielding growth, rather than stemming inflation, as Europe's debt woes and a struggling US economy increase the risk of another global recession. Australia and Indonesia have cut interest rates this month, while the Philippines in October unveiled a fiscal stimulus package to spur the economy.

In China, "the risk in the short term of any hard landing is very limited - we believe that a soft landing will take place," Hofman said. The World Bank predicted China's GDP growth will ease next year from a 9.1 per cent pace in 2011.

China Property
A real-estate bust would have a "strong impact on domestic demand and consumer sentiment" in China, according to the report.

Even so, the government has "ample fiscal space and room for monetary policy normalisation should such a need arise, more so now that inflation seems to be on the wane again," the bank said.

The World Bank forecast China's inflation rate to slow to 4.1 per cent next year — still "elevated" — from 5.3 per cent in 2011.

Emerging Asian nations felt the impact of Europe's woes in September, when their currencies slid against the dollar, prompting them to use some of their foreign-currency holdings to limit the impact. The World Bank said that reserves "should be sufficient to withstand further shocks."

"Investors still do not fully discount the possibility of a disorderly sovereign debt restructuring in the advanced economies," the World Bank said. "Should such an event occur, it may well trigger another recession in Europe. Spillovers to developing East Asia will be substantial, through trade, financial flows, remittances, and consumer and investor sentiment."

Asia's Reserves
East Asian countries had a median value of foreign-exchange reserves equivalent to 50.4 per cent of gross domestic product as of mid-2011, or enough to cover 8.9 months worth of imports, according to the World Bank.

Policymakers in the region are "likely to hold off further policy tightening and stand ready to act should further negative shocks to growth occur or in the extreme case of a disorderly resolution of the euro zone debt problem," it said.

In China, monetary conditions "remain accommodative" and there's space for further fiscal stimulus if necessary, the World Bank said. The central bank said November 16 that it can't relax vigilance over inflation, as "the foundation of price stability is not yet solid," while reiterating Premier Wen Jiabao's pledge to "fine-tune" policies when needed.

"Policymakers will need to walk a fine line guarding against the short-term risks to growth and the lingering vulnerabilities associated with a still-buoyant, if not overheated, economy," the World Bank said. "To mitigate the vulnerabilities of continued low real interest rates, an easing of fiscal policy appears the most appropriate line of defense before the monetary policy stance is eased."

Surplus Cushion
While new capital rules being introduced in Europe will constrain the ability of the region's banks to lend in Asia, high reserves and current account surpluses in most East Asian countries will protect them from the impact of possible renewed financial stress, the World Bank said.

"Bank credit flows remained stable through the first half of 2011 but represent an important risk, should European banks start deleveraging," the Washington-based lender said. "Even if a definitive euro zone settlement is implemented successfully, European banks would likely need to deleverage and could reduce exposure to emerging markets."

International banks reduced loans available to East Asian companies by about $36 billion between the middle of 2008 and the first quarter of 2009, the World Bank said.

"An impact of similar proportions now could mean that over $30 billion dollars flow out, constraining credit available to the private sector," according to the report. European banks have about $427 billion of loans outstanding to developing East Asia, it said.

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First Published: Nov 23 2011 | 12:48 AM IST

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