The Far East has shaken off the deep downturn earlier this year and looks poised to drive a fresh cycle of global growth in 2013. “China appears to have bottomed out,” said the Bank in its regional report.
Asia’s powerhouse economy will rebound with 8.4pc growth next year as credit stimulus and an infrastructure blitz by local governments gain traction, with knock-on effects through East Asia. The region as a whole will grow by 7.9pc, with Myanmar at last starting to catch up as undertakes “formidable reforms”.
The new risk is a return to overheating as ultra-loose monetary policies in the West trigger a “flood of capital into the region that could lead to asset bubbles and excessive credit growth” -- with the risk of sharp reversals later.
“Authorities should closely monitor developments on the capital account, especially in countries that have recently experienced rapid credit growth,” it said.
The Bank said Asian states should defend their economies from excess money printed by central banks in the US, Europe, and Japan by imposing short-term “capital controls” when needed. It added that exchange curbs are no substitute for “appropriate exchange rate arrangements” over the longer term, a criticism clearly directed at China’s dollar peg.
By holding down the yuan - to boost exports - China is in effect importing a US monetary policy that is far too loose for its own internal needs, creating inflationary “blow-back”.This may not have mattered after the Lehman crisis when the Politburo deliberately boosted credit by over 30pc a year, but it has now become malign.
Fitch Ratings said the balance sheets of Chinese lenders have exploded to $24 trillion, including shadow banking and trusts. The cumulative increase since 2008 is $14 trillion, roughly equal to the US banking system. This has already gone beyond the safe speed limit, with little benefits. Fitch said the extra output created by each extra yuan of credit has fallen from 0.75 to 0.30.
For now, Asia’s rebound is a huge relief for the rest of the world. It follows a mini-slump through mid-2012 as China’s calibrated `tap on the brakes’ set off a deeper downturn than intended. What began as lending curbs to cool the property boom snowballed into an industrial recession, pushing steel plants to the brink.
The World Bank said China will slow to 8pc growth in 2014 and must embark on deep reforms to avoid the `middle income trap’ thereafter. It must wean the economy from infrastructure projects and switch to consumption with tax cuts and higher welfare spending.
Any further moves to shore up grwoth in the future should come from fiscal stimulus not by looseing the credit spigot. Public debt is just 20pc of GDP. The budget deficit is 2.5pc, though rising as fuel subsidies soak up public funds.
The report said China needs an entirely new model to compete at the technology frontier. The “easy” economic gains of catch-up growth are “no longer available”.
The Telegraph
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