The Global Economic Crisis: Asia and the role of China Elliott School of International Affairs, George Washington University March 31, 2009

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1 The Global Economic Crisis: Asia and the role of China Elliott School of International Affairs, George Washington University March 31, 29 Anoop Singh Asia and Pacific Department IMF 1

2 Five key questions Why has Asia been hit so hard? What is the outlook for Asia? What are the main risks to Asia? What is the role for policies in the region? Is China different? 2

3 A sharp and synchronized collapse in global growth... World Real GDP growth Year-on-year percent change Latin America debt crisis and contractionary policies in industrialized economies First oil price shock Banking crisis IT bust Source: IMF, World Economic Outlook database Why has Asia been hit so hard? 3

4 ...has hit Asia more than we expected 28Q4 GDP Growth Quarter-on-quarter percent change, SAAR 28Q4 GDP Growth 1 Quarter-on-quarter percent change, SAAR Euro Area United States Hong Kong SAR Japan Singapore Korea Taiwan Province of China Sources: Haver Analytics; and IMF staff calculations The surprise in actual G-2 growth over Nov-8 WEO forecast would have implied this revision for Asia based on the model. G-2 Asia (excl. China and India) But the actual revision was much larger Asia (excl. China and India) Sources: Haver Analytics; and IMF, World Economic Outlook database and staff estimates. 1 PPP GDP Weighted. Does not include New Zealand and Vietnam. Why has Asia been hit so hard? 4

5 ...reflecting its specialization in advanced manufacturing Q4 GDP Growth vs. Share of Advanced Manufacturing in GDP GDP Growth Q4/28 (SAAR) Australia Canada Netherlands Spain France United Kingdom United States Italy Mexico Japan Germany Malaysia Singapore Korea Taiwan Province of China Share of high and medium-high tech manufacturing value added in GDP Sources: Haver Analytics; OECD; and IMF staff estimates. Why has Asia been hit so hard? 5

6 Exports have declined through the Asian supply chain, and more than in other regions Asia: Exports of Goods 3-month percent change of 3-mma, SAAR; US$ basis 6 Exports of Goods 1 Year-on-year change; US$ basis Jan-7 Mar-7 High value-added exporters 1/ Low value-added exporters 2/ May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Sources: Haver Analytics; CEIC Data Company Ltd.; and IMF staff calculations. 1/ Japan, Hong Kong SAR, Korea, Singapore,Taiwan Province of China and Thailand. 2/ China, India, Indonesia, Malaysia, Philippines, and Vietnam. Jan Asia (excl. China and India, Jan-9) Major Latin America (Dec-8) Euro Area (Dec-8) Sources: Haver Analytics; and IMF, World Economic Outlook database and staff calculations. 1 Nominal export share weighted for Asia and Latin America. Why has Asia been hit so hard? 6

7 A double hit for Asia: it s both exports and domestic demand Japan and NIEs: Contribution to GDP growth Year-on-year, in percent Exports Domestic demand Asian Crisis 2-1 recession 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2Q1 21Q1 22Q1 23Q1 24Q1 25Q1 26Q1 27Q1 28Q1 Sources: Haver Analytics; and IMF, World Economic Outlook database and staff calculations. Why has Asia been hit so hard? 7

8 Global recovery is expected only in mid- 21 and risks are on the downside World Output to to 2. US Euro Area Japan Emerging and developing economies to to 4.5 What is the outlook? 8

9 What does this mean for Asia? Growth will fall sharply this year and recovery will be slow y/y in percent Asia to to 5.2 Industrial to to.8 Emerging to to 6.4 NIEs to to 3.1 ASEAN to to 4.1 What is the outlook? 9

10 Risk 1: A much slower recovery of the G2 United States: Gross Domestic Product Rebased at the beginning of each time period = 1 Euro Area: Gross Domestic Product Rebased at the beginning of each time period = Q1-21Q4 21Q1-23Q4 1997Q3-2Q Q1-21Q4 21Q1-23Q4 1997Q3-2Q t= t=1 t=2 t=3 t=4 t=5 t=6 t=7 t=8 t=9 t=1 t=11 95 t= t=1 t=2 t=3 t=4 t=5 t=6 t=7 t=8 t=9 t=1 t=11 Source: IMF, World Economic Outlook database. Source: IMF, World Economic Outlook database. What are the risks to Asia? 1

11 Risk 2: Intensified feedback loop between corporates and banks Credit Risk: itraxx Indices 1 7 Asia excl. Japan 6 Japan Selected Asia: Drop in Financial Sector Stocks vis-à-vis Overall Stock Market Ratio of change since January 28 Indonesia Australia India Malaysia Korea Philippines Thailand Hong Kong SAR Better than market Worse than market Jan-8 Feb-8 Mar-8 May-8 Jun-8 Jul-8 Sep-8 Oct-8 Dec-8 Jan-9 Sources: Bloomberg LP; and Datastream. 1 itraxx Indices are a set of credit default swap indices covering regions or sectors and contain the most liquid names in that market, based on a dealer poll. Feb Sources: CEIC Data Company Ltd; and IMF staff calculations. 1 A ratio greater than unity implies a higher relative loss for the financial sector stocks. A ratio between zero and one implies financial sector stocks losing less than market since January 28. What are the risks to Asia? 11

12 Risk 3: Much larger unemployment lies ahead Selected Asia: Industrial Production and Employment Year-on-year percent change; January 26 to January Industrial production (LHS) Employment (RHS) Japan Korea Taiwan Province of China Sources: CEIC Data Company Ltd; and IMF staff calculations. What are the risks to Asia? 12

13 Risk 4: Long-term consequences of the end of the easy credit finance era Japanese Exports of Motor Vehicles vs. Auto Financing In billions of Japanese Yen (left scale); in U.S. dollars per car (right scale) Japanese exports of motor vehicles (LHS) U.S. new car loans: financed amount (RHS) Jan-4 Nov-4 Sep-5 Jul-6 May-7 Mar-8 Jan-9 Source: Haver Analytics. What are the risks to Asia? 13

14 There is some room to lower policy rates further Policy Interest Rates In percent Real Interest Rates 1 In percent 6 5 Asia EU US 3 2 Asia EU US Sep-8 Oct-8 Nov-8 Dec-8 Jan-9 Feb-9 Sources: Haver Analytics; and IMF staff calculations. -3 Sep-8 Oct-8 Nov-8 Dec-8 Sources: Consensus Economics Inc; and IMF staff calculations. 1 Policy interest rates less one-year ahead inflation expectations from consensus forecasts. Jan-9 What is the role for policies in the region? 14

15 But unconventional policies may also be needed Domestic Assets on Central Bank Balance Sheets Change since June 28, in percent Asia: Ratio of Base Money to Broad Money In percent US Japan Korea Hong Kong SAR Korea Japan Sources: Haver Analytics; and IMF staff calculations. Sources: CEIC Data Company Ltd; and IMF staff calculations. What is the role for policies in the region? 15

16 Strengthening bank capital would also help Expected Increase in Bank Write-downs from Corporate Sector Loans 1 In percent of banking sector loans Actual at end 28 Expected 1-year ahead Industrial Asia NIEs China and India ASEAN-4 Source: IMF staff estimates. 1 Estimates are based on exposure to coporate sector loans and expected distress in corporate sector as indicated by credit default swap spreads. What is the role for policies in the region? 16

17 Fiscal stimulus for 29 is slightly above G2 average, but G - 2 : D i s c r e t i o n a r y F i s c a l M e a s u r e s, 2 9 In p e rce n t o f G D P 4 A verag e ( P P P G D P w e ig hted) India Indonesia Japan Australia Korea China Italy Brazil France Argentina UK Canada Germany Mexico S. Africa US Russia S. Arabia S o u rce s: IM F, W orld Econom ic O utlook database and s t a f f e s t im a t e s a n d c a lc u la t io n s. What is the role for policies in the region? 17

18 Further stimulus will be needed in 21 G -2: D iscretionary Fiscal M easures, 2 1 In pe rce nt o f G D P 4 A verage (PPP G D P w eighted) India Indonesia Japan Australia Korea China Italy Brazil France UK Canada Germany S. Africa US Russia S. Arabia S o u rce s: IM F, W orld Econom ic O utlook database and sta ff e stim a te s a n d ca lcu la tio n s. What is the role for policies in the region? 18

19 Is China different? What has its policy response been? What is China s s economic outlook? What are China s s key medium-term challenges? 19

20 China has not been immune to the crisis Real Industrial Value Added and Exports (12-month growth rate) Value added Exports (right axis) -3-4 Feb-7 Oct-7 Jun-8 Feb-9 Is China different? 2

21 But the authorities have responded proactively 1 Debt and Fiscal Balance (In percent of GDP) Interbank and Policy Rates Fiscal balance (left axis) SHIBOR (7 days) Government Debt PBC Bill (3 months) proj 21 proj.. Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9. Is China different? 21

22 The stimulus is already working... 4 Real Fixed Asset Investment Spending (Contribution to percent change, year-on-year) 4 27 Loan Growth and Monthly Loan 1,8 1, ,4 17 Loan growth (y-o-y, left axis) 1, , Non-SOE SOE Total Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Is China different? 22

23 ...and its spillovers are benefiting households Real Retail Sales 1/ (12-month growth rate) Retail sales (left axis) No. of passenger cars (right axis) (In percent) Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 1/ January and February data are averaged. -3 Is China different? 23

24 The policy action is expected to support China s s growth Growth and Increase in Fiscal Deficit (Percent change; percent of GDP) Increase in deficit (right axis) GDP growth (left axis) proj Is China different? 24

25 ...but the spillover to the region is likely to remain small 6 5 Capital Good Imports (In percent change year-on-year) Imports from Asia (In percent change year-on-year) ASEAN Asia -3 Feb-7 Jun-7 Oct-7 Feb-8 Jun-8 Oct-8 Feb Feb-7 Jun-7 Oct-7 Feb-8 Jun-8 Oct-8 Feb-9-4 Is China different? 25

26 China s s key medium term challenge: rebalancing growth 5 GDP Expenditure Components (In percent of GDP) 2 1 Consumption Expenditure (In percent of GDP, avereage for 23 7) Japan India Thailand Korea Malaysia China Singapore Ireland 3 Private consumption Investment Net exports , 2, 3, 4, 5, 6, 7, GDP per capita (US$, 27) Is China different? 26

27 Steady appreciation would help boost consumption and rebalance the economy China's Bilateral and Nominal Effective Exchange Rate NEER (2=1) US$/RMB (right axis; inverted scale) Jan-7 Jul-7 Jan-8 Jul-8 Jan Is China different? 27

28 There is still scope for further fiscal stimulus to reverse the decline in private consumption China: Stimulus Package (In percent of 28 GDP) Healthcare and education,.5 Innovation and structural adjustment, 1.2 Infrastructure, 5. Low-income housing support, 1.1 Environmental protection,.7 Post-disaster reconstruction, 3.3 Rural incomes and infrastructure, 1.2 Is China different? 28