The Asian Development Bank (ADB) has cut sharply its forecast for China’s growth this year and next. In the latest half-yearly update to its annual regional economic outlook, it says it expects GDP growth to come in at 7.6% this year, down from its earlier forecast of 8.2%. It also cut its 2014 forecast to 7.4% from 8.0%. Both the new numbers are below last year’s 7.7% growth.
The ADB says the lower figures reflect “the authorities efforts to forge a more balanced and sustainable growth path than the familiar one led by exports and investment”. This has been evident in the recent efforts to rein in credit and tackle the burgeoning shadow banking system. Shadow banking, the ADB notes, “is is frequently associated with lending to the booming real estate sector and to infrastructure through the off-budget financing vehicles of local governments, many of which are believed to have accumulated high debt”. Taken in aggregate, the more problematic parts of the shadow banking system, including wealth management products as well as real-estate and off-balance-sheet lending, equal 38.1% of GDP, or 18.7% of banking assets, by the ADB’s reckoning. Quite an overhang.
A slowing Chinese economy also casts a shadow over developing Asia’s economies. The ADB now sees regional growth slowing to 6% this year from 2012’s 6.1% but picking up to 6.2% next year, despite China’s expected continued slowing.
The ADB notes that China’s slowing growth accommodates structural reform in the long term, but also points out that it has been investment rather than an increase in consumption that has characterized the rebalancing of the economy since the 2008 global financial crisis. Investment contributed 5 percentage points to growth in 2008-2012; consumption contributed 0.1%. Some old habits die hard for all the reformist zeal.
Opportunity or challenge? The ADB says that “more robust growth in consumption would make rebalancing more sustainable”. To that end it suggests expanding public social spending and safety nets to encourage a lower household savings rate.