IMF sees soft landing for China's red-hot economy

Reiner S, Bangkok

The International Monetary Fund (IMF) is optimistic that the tightening measures taken by the Chinese authority to cool down an overheating economy will result in a "soft landing" for the region's giant economy.

The fund also said that even if there were to be a sharper drop in China's economic growth as a result of its retrenchment policy, the impact on Asian countries would be limited, particularly amid the improving global economic condition.

"Macroeconomic policy in China is being tightened to reduce overheating and hopefully achieve a 'soft landing', which is in everyone's interest," said Thomas Rumbaugh, deputy division chief of the IMF Asia Pacific department, during a discussion on the matter with a small group of journalists from Asia on Friday.

He said that measures taken by the Chinese authorities to cope with its overheating economy early on in the cycle was a "very good sign".

The IMF statement came amid increasing worries in the region that the retrenchment policy, which among other things includes a the banning of fresh loans in overheated industries, would result in a hard landing, or a sharp drop in China's economy, which last year grew by more than 9 percent.

This in turn is feared to have a serious negative impact on other Asian countries, which have been enjoying rising trade volumes with China.

Indonesia, for example, has seen its exports to China increase from 4.5 percent of total exports in 2000 to 5.1 percent in 2002 and to 7.4 percent last year. The government expects exports to contribute to accelerating economic growth this year.

But the IMF played down the aforementioned concerns. It said that while the Asian region's exports to China had grown rapidly, they still only accounted for about 15 percent of their exports.

"With the growth outlook improving in the rest of the world, the outlook for the region is still robust," Rumbaugh said.

"Thus, even if there were to be a sharper drop in China's growth, the impact on the region would be manageable," Rumbaugh said.

According to the IMF scenario, a 10 percentage point decline in China's nonprocessing import growth would only result in a one percentage point drop in Asia's export volume growth rate this year from an estimated 8.6 percent to 7.6 percent.

Eyebox:

Estimated impact of a 10 percentage point decline in China's nonprocessing import growth on export volume growth rates

WEO* baseline for 2004 (%) After China the "shock" (%)

Asia excl. China 8.6 7.6 Industrial countries 8.4 7.3 Japan 9.1 7.9 Asia NIES ** 14.9 13.8 Other Asian nations 6.3 5.6 ASEAN-4 *** 4.8 4.1

* IMF's World Economic Outlook. ** Asia NIES (newly industrialized economies): South Korea, Singapore, Hong Kong, Taiwan *** ASEAN-4: Thailand, Malaysia, Indonesia, the Philippines