Ahead of the 2016 Asian Development Bank annual meeting in Frankfurt, the president of the ADB discusses China’s slowdown and reform agenda while underscoring that other parts of Asia – such as India – are still growing strongly. Interview by Stefania Palma.

Takehiko Nakao, president of the Asian Development Bank (ADB), is not worried about China. The country’s gross domestic product (GDP) may be growing at the lowest rate since 1990 – 6.9% in 2015 – but he is keen to emphasise that this is not synonymous with a collapsing economy. 

“China’s growth rate will decrease but there will be no hard landing thanks to China’s consumer-based growth and the growth of the services sector," says Mr Nakao. "Now that China’s current account surplus has dropped from 10% to 2% of GDP, domestic demand will become far more important to sustain growth. There is still scope for fiscal and monetary policies. Also, China’s per capita GDP is below that of developed economies, meaning there is still room to grow.” 

Economic adjustments

The Chinese government’s devaluation of the renminbi in August 2015 was part of the Chinese economy’s adjustment. Coupled with China's stock market losing more than one-third of its value in just 30 days a month earlier, the currency move destabilised the global foreign exchange market. The renminbi has since dropped by 15% against the dollar.

“China let market forces affect the currency value, as was suggested by the International Monetary Fund,” says Mr Nakao. And to those who suggest the currency move was aimed at cheapening Chinese exports, he says: “[In August 2015] the Chinese government stopped intervening as much as it used to in the currency. The renminbi used to have the tendency of appreciating, so when it depreciated that quickly, the market was surprised. But I think the market is digesting this move now. In any case, it is not fair to say we are in a currency war.”

But in light of a jittery foreign exchange market, sound capital flow management will be essential to avoid further volatility, according to Mr Nakao. “A currency move that is too rapid could cause volatility in capital flows, which would then bring about more volatility in the exchange rate. The authorities understand this,” he says. “The management of capital outflows can be an option, but it should be designed carefully since it might have an impact on investors’ views – unless they can withdraw money quickly, they won’t invest.” Estimates suggest China’s capital outflow amounted to as much as $1000bn in 2015, if trade surpluses and inbound investment flows are included.

China’s SOE reform

Another aspect of the adjustment in China’s economic model is its state-owned enterprise (SOE) reform. In early March, news agency Reuters reported that China is aiming to lay off 5 million to 6 million state workers over the next two to three years to curb industrial overcapacity and pollution. In response, Xiao Yaqing, the head of China’s state-owned assets supervision and administration commission, stated that the SOE reform will mainly involve mergers and acquisitions (M&A) instead of bankruptcies. 

Although future repercussions on SOEs are still unclear, it is widely recognised that the SOE reform is finally under way. “The third plenum in 2013 clearly outlined the SOE reform. Lay-offs and bankruptcies could have a negative impact on consumer sentiment. But the adjustment needed to happen, otherwise companies would have continued producing above demand levels,” says Mr Nakao.

Implementing this reform could also help China avoid the hiccups experienced by Japan’s economy during its SOE reform of the 1990s. “Japan was often criticised for keeping the capacity of companies for too long. However, one of Japan’s biggest mistakes was to try to kill the bubble totally after the bubble burst. In that case, Japan might have needed a more gradual, accommodative monetary policy,” says Mr Nakao. 

China’s impact on Asia

The adjustment to China’s economy is contributing heavily to the slowing of GDP growth and squeezing Chinese demand for commodities and imports. Countries exporting to China and commodity producers, in particular, are being hurt by China’s slowdown the most. Some of them are in Asia. 

Indeed, Mongolia is one of the most dependent countries on commodity exports and Chinese demand in the world – China takes 95% of its exports, of which 83% are commodities. As a result, in 2015 the ADB granted Mongolia a $150m loan to fund short-term government revenue shortages that could have led to cuts in the state’s welfare programmes.

But Mr Nakao underscores that other parts of the region are growing strongly, despite China’s economic slowdown. “It is normal for us to pay attention to China’s slowdown after benefiting from Chinese high growth in the wake of the global financial crisis, supported by its expansionary policies," he says. "Today, China is a key global commodity importer. But China is not the only story in Asia. In terms of aggregate numbers, developing Asia might be slowing down because of the mere weight of China’s economy, but we shouldn’t forget there are countries, especially in south Asia and south-east Asia, that are growing fast.” 

These include India, Bangladesh, Sri Lanka, Pakistan, Indonesia, Myanmar, the Philippines and Vietnam. The ADB is adjusting growth projections upwards for some of these countries and Asia is still growing at an overall rate of 6%. And while China’s labour force is shrinking, many of these countries benefit from young and large populations.

India’s moment?

So, as China’s economy slows down, could India become the new Asia growth story? Mr Nakao does not rule this out. At 7.3%, India’s rate of real GDP annual growth in the last quarter of 2015 was the fastest among large economies worldwide. And with exports to China accounting for just 4% of total exports, the impact of drops in China’s export demand will be limited, says Mr Nakao. India could even benefit from lower commodity prices. “India, in reality, could gain from lower commodity prices, including oil, because it is a net commodity importer,” says Mr Nakao.

But in order for India to fulfil its growth potential, it will need to strengthen links to other economies. “What is important is for India to look beyond its borders. It should be more connected with the rest of the world, including east Asia and south-east Asia. It should be part of the global value chain and division of labour, which was one of the secrets of Asia’s growth story,” says Mr Nakao.

Pushing for structural reforms addressing red tape, regionalism, land acquisition, the goods and services tax, the infrastructure crisis, wide income inequality and tax inefficiencies will also be crucial to quickening India’s economic development, according to Mr Nakao. “Prime minister Narendra Modi’s resolve is very strong and [he] knows [India’s] problems, although the inertia and the system may not be easy to change,” he says.

Although India faces the challenge of regionalism and a multitude of languages and faiths, it also has a growing population and a strong IT sector, says Mr Nakao. “If China could do it, why can’t India?” he asks.

To Mr Nakao, eliminating India’s ceiling on foreign direct investment (FDI) inflows is also crucial. “It is important that India opens up its economy further. The government has good intentions but there still are big hurdles to FDI, which should be key in India’s development. FDI into India, as well as state investment in infrastructure, are both much lower versus China,” he says.

Asia-EU links

FDI and the role of the private sector in spurring economic growth will be some of the key topics discussed at the 2016 ADB annual meeting in Frankfurt – the first to be held in Germany, China’s top European trading partner and also the leading destination for Chinese overseas M&A in Europe.

Other topics will include green development, technical and vocational training, making workplaces safer and greener, and financing small and medium-sized enterprises. “We have so many agendas in common with Europe. It is an important opportunity to revisit stronger ties between Asia and Europe,” says Mr Nakao.

“When I visited Spain and Portugal I was so impressed to see such strong interest in Asian infrastructure development in power, water, cities, education through IT, [and the] internet. There was also a lot of interest in receiving investment from Asia,” he adds.

Revisiting these trade and investment opportunities, however, is also important for Europe – while Asia is the fastest growing region in the world, European economies are barely growing at all. “For Germany it is a good opportunity because Europe is going through a difficult situation,” says Mr Nakao.


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