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Fed normalization will not be problem for Asia, ADB says

Chinese corporate debt problem 'well under control'

The yuan could come under pressure to appreciate if U.S. interest rate increases come faster than expected.   © Reuters

HONG KONG -- Asia is set to take U.S. Federal Reserve moves toward monetary-policy normalization in stride, according to Asian Development Bank Chief Economist Yasuyuki Sawada.

"The Fed has been very clear in communicating with the market about its monetary-policy normalization," Sawada told the Nikkei Asian Review in an interview on Wednesday in Hong Kong. Last week, the Fed announced it would start to sell down its $4.5 trillion portfolio of bonds and other securities bought to keep down market interest rates. It has already started to move up its benchmark interest rate from close to zero.

"It's not really a big surprise. As the Fed already announced [its intentions] beforehand, it's nothing like the 'taper tantrum' of 2013," Sawada said, referring to an episode that saw Indonesia, India, Turkey, Brazil and South Africa hit hard by foreign capital flight on worries their economic positions were especially vulnerable.

Asia's vulnerability, in Sawada's view, has declined just in the past five months thanks to an uptick in global trade and economic growth in developed countries. He noted that at the time of the bank's last regional update in April, it had warned that higher interest rates could raise the risk of insolvency, particularly for indebted Asian households, but said that no longer seemed much of a danger.

Asian Development Bank Chief Economist Yasuyuki Sawada (Photo by Yasuo Awai)

Still, he said, "some monetary authorities or central banks in Asia may respond to this [Fed] interest rate [policy] change by tightening monetary policy." Floating exchange rates may also come under some pressure.

"[But] we don't see any emerging big uncertainty or risk," he said. "We don't think this [normalization] will create a big change in the fundamentals of the economies" of the region.

The Fed could become less predictable in the coming months. Vice Chairman Stanley Fischer will depart in October, Chairwoman Janet Yellen's term will expire in February and other open seats on the Fed board need to be filled.

"If [U.S.] interest-rate increases were done at a sharper-than-expected speed," Sawada said, "there may be exchange-rate pressure on the renminbi and some pressure for capital outflow from China."

In general, Sawada is upbeat about China's economic outlook. On Tuesday, the bank raised its forecast for the country's gross domestic product growth this year to 6.7% from 6.5% and next year's figure to 6.4% from 6.2%.

Sawada said he expected little economic impact to emerge from next month's Communist Party Congress in Beijing. "Our prediction is there won't be [any] big change in the policy position of China," he said, with the authorities continuing to prioritize rebalancing the economy toward consumption and services from investment and manufacturing, and emphasizing financial stability.

"The Chinese economy's rebalancing seems to be going quite smoothly," he said, highlighting e-commerce as a significant factor. He said Beijing's emphasis on deleveraging and restraining credit growth appeared to be addressing the risks posed by high corporate debt levels. "Overall, the Chinese corporate debt problem seems to be really well under control by the government."

In contrast with its stance on China, the regional development bank this week cut its growth forecasts for India to 7% from 7.4% for the fiscal year ending next March and to 7.4% from 7.6% for the following fiscal year. Sawada, however, sees signs that India's economy is adjusting to the impact of the demonetization policy announced a year ago and the goods and sales tax, or GST, introduced in July.

The measures dampened consumption and investment, but both should start to turn around amid low inflation, a strong rupee and rate cuts by the Reserve Bank of India. Sawada said the GST should bring in more government revenue, enabling higher investment in infrastructure, while bankruptcy reforms should help address the country's bad-loan problem. "Medium term, at least, we will likely see the economy pick up," he said.

Sawada, who was an economics professor at the University of Tokyo before joining the ADB last November, declined to comment directly when asked about Japanese Prime Minister Shinzo Abe's plan announced on Monday to channel revenues from a scheduled consumption tax increase into education.

He commented instead: "Investment in human capital is quite important for medium-term and long-term acceleration of economic growth. Improved human capital leads to better income, better asset holdings, and that will generate a consumption market for suppliers. From a medium-term and long-term perspective, spending money on human capital is not a bad idea."

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