January 6, 2016 4:00 pm JST
Interview with ADB economist

US rate hike won't derail Asian growth

Juzhong Zhuang, deputy chief economist at the Asian Development Bank

MANILA -- The U.S. Federal Reserve's recent decision to raise interest rates for the first time in nearly a decade has triggered fears that developing Asia will be badly hurt by an exodus of cash and swelling dollar-denominated debt. But Juzhong Zhuang, deputy chief economist at the Asian Development Bank, says the region will brush off the negative impacts and continue to grow. In an interview with the Japan Center for Economic Research, Zhuang discusses what lies ahead for Asia's economy in and 2016.

Q: How will the U.S. interest rate hike impact developing Asia?

A: The impact has been priced into the market. By and large, Asia as a whole will be OK amid the volatility. Governments need to watch carefully and take action. The ADB provides countercyclical loans to countries with equity and volatility problems -- $1 billion to Kazakhstan, which has a problem with falling oil prices, and $150 million to Mongolia, which is confronting lower commodity prices. Small countries are OK, but big countries that have been systemically impacted will need help in terms of liquidity.

     The impact on growth will probably be small. The U.S. interest rate will increase by 0.25 percentage point every quarter. But the impact on emerging Asia will be negligible. For China, the impact will be a 0.1% reduction in (gross domestic product) growth.

     On one hand, a higher U.S. interest rate and a strong U.S. dollar are good for exports. On the other hand, loans that many companies have taken out in foreign currencies may place a burden on their balance sheets. Balance sheets will need to be managed.

Q: Are you saying we won't see the kind of panic that accompanied the Asian financial crisis in 1997?

A: Yes. That crisis was so large because companies borrowed excessively in foreign currencies. This time, the borrowings are smaller and many countries have learned lessons from the Asian crisis. There is better regulation.

Q: Will the downward pressure on Asian economies continue after 2016?

A: The GDP growth projection for developing Asia in 2016 is 6.0%, higher than (the 5.8%) in 2015. Six percent is still good. Recent economic data from the U.S. -- for example, employment data -- is quite encouraging. The U.S. core inflation rate, excluding food and energy prices, is slowly approaching the Fed's target (of 2%). The EU will be stronger. Japan's economy will also see some improvement in 2016.

     China's slowdown will be partly offset by India. Southeast Asia is an open economy. Central Asian growth will also be higher. That area relies on commodity exposure remittances from Russia. Oil prices will move higher, or at least remain stable. The oil recovery will be favorable for Indonesia and Malaysia.

Q: China's GDP growth has been slowing. Will this trend continue after 2016?

A: There are many factors behind the slowdown. Some are cyclical -- for instance, excess capacity in the steel and cement industries. There are also structural issues. One is China's rebalancing -- the shift in its growth model from manufacturing exports to growth based on domestic consumption. Another issue is a declining working-age population and shrinking labor force.

Q: How significant is the introduction of China's two-child policy?

A: It will be helpful overall because of China's aging population and shrinking working-age population. The negative impact of the one-child policy has not been economic but social, such as the unbalanced gender ratio.

     There are not so many couples willing to have two children. The new policy will no doubt have a positive impact, but we cannot assume that every couple will have two children.

Q: What is your view of the Japanese economy? Will "Abenomics" keep Japan growing?

A: The ADB views Abenomics positively. Of course, it will take more time for the government to reach its targets. There has been a lot of encouraging progress. For example, Abe's "third arrow" of structural reforms -- increasing female workforce participation and creating special economic zones. Participating in the planned Trans-Pacific Partnership free trade pact is very good for the Japanese economy. But more needs to be done to ensure sustainable long-term growth.

     To increase the ratio of female workforce participation, you need more child care facilities. I know that is not so easy. In China, female labor participation is declining because the more money people have, the more they want to be at home.

Q: What is Japan's role in relation to developing Asia?

A: The Japanese economy plays a very important role in supporting developing Asian countries. Japan is the largest source of foreign direct investment for developing Asia. Investment from China is increasing, but Japan is the main source. Japan is the leader in many areas, such as in traditional technology, as well as in new technology, like robots. Japan faces the challenge of an aging population. Developing Asian countries, such as India, have young populations. There are benefits to both situations. We expect Japanese companies to invest in Southeast Asia, in Central Asia and in South Asia.

Q: What country do you see as the driver of the developing Asian economy after 2016?

A: India is the key country. Our GDP forecast for 2016 is 7.8%. India has made progress on reforms, such as with public banks and industry consolidation. Tax reforms and new rules on the acquisition of land help with infrastructure problems. In 2016, these difficult reforms will push up GDP growth by increasing consumption.

     India has many advantages -- a young population, a good education system, a strong information technology sector. Indians also speak English. It is an especially good thing that the population is young and large, because India needs to develop its manufacturing sector. In previous years, the government focused more on the service sector. But the current government recognizes the importance of manufacturing.

     Compared with services including software, developing the manufacturing sector is more difficult. Infrastructure, international advice and better government coordination are needed. The South Korean economy relies on manufacturing. China is following the Japanese and Korean model. Germany, the U.S., and early Britain become rich because of manufacturing. The Philippines is in the same situation as India.

Q: How should we address the problem of inequality in developing Asia?

A: Income inequality has increased in many countries in the last 10 years. What is most important is to create more jobs. Rural labor should be diverted to urban manufacturing so that countries can have more productivity and higher pay. The second point is to reduce inequality in human capital: the gap between skilled and unskilled workers. You cannot control wages, but you can reduce inequality in human capital by increasing public spending on education for poor households. Cognitive skills need to be improved. The third is to reduce regional inequality by connecting infrastructure, urbanization and reducing the rural income gap.       

Interviewed by Tsuyoshi Minami, economist at the Japan Center for Economic Research

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