China, India to set Asia's economic pace


China will top the growth averages for the next decade, a leading forecaster says

By Geoff Hiscock
CNN Asia Business Editor

SYDNEY, Australia (CNN) -- Asia-Pacific's economic growth over the next 10 years will exceed 5 percent, with China and India leading the way, long-range forecaster BIS Shrapnel says in its latest outlook.

It sees Asia's recovery from the 2001 slowdown as being stronger than expected, but warns it must develop new industries and diversify away from electronics.

Asia's two most populous nations will set the growth pace over the next decade, with China averaging 7.0 percent a year and India on 6.5 percent.

Vietnam will be the other star performer, also growing at a 7.0 percent annual average.

The Sydney-based forecaster says these three countries have emerged since the 1997 Asian financial crisis as the "factories" for the region's more developed economies.

Direct competitive threat

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It says the most obvious impact of this is on Malaysia, Thailand, the Philippines and Indonesia, all of which face "a direct competitive threat". (ASEAN growth target)

But it warns that the more advanced economies in the region are also feeling the heat from the growing role of China, India and Vietnam as low-cost producers.

"Tensions are mounting over the hollowing-out of South Korea, Taiwan and Singapore, and Hong Kong has been provoked into direct cost deflation to retain industry," it said.

In its Asia Pacific Economic Outlook update released this week, BIS Shrapnel said that Japan, the world's No. 2 economy, will likely grow at 2.2 percent a year for the decade to 2012.

But it sees no early recovery from the recession that has been weighing heavily on the Japanese economy, despite signs of an upturn in 2002. It forecasts a 1 percent contraction this year for Japan and zero growth next year.

Pessimistic outlook

That is a slightly more pessimistic outlook than other recent predictions.

Earlier this month, the International Monetary Fund said that even with strong growth in the first quarter of 2002, it expected Japan's real gross domestic product to shrink half a percent for the full year. (Full Story)

Regional forecasters such as IMA Asia and the Pacific Economic Outlook see Japan achieving growth next year of 1.2 percent to 1.5 percent.

"Japan is still lagging badly in the recovery process," BIS Shrapnel said in its report.

"The mid-year confidence surge appears more an expression of surprise that developments have not been worse than a well-founded sign that the patient has been cured," it noted.

Problems in Hong Kong


China's low-cost factories, along with those of India and Vietnam, are putting pressure on other economies in the region

The other problem is Hong Kong, which BIS-Shrapnel says is mired in deflation and is the only economy missing out on Asia's recovery.

It notes that there are question marks over how sustainable the regional rebound will be, without an improvement in the main global growth engines such as the United States, Europe and Japan itself.

It sees a strong possibility that the United States will suffer a "double dip" downturn as confidence is sapped by the fall in equity markets.

It says Europe may contribute more positively to growth this year now that the euro is strengthening, but says it doubts whether Japan can be a source of growth for Asia for the next two years.

The forecaster says the external impetus to regional growth will therefore be muted, and global tensions will also have an impact.

China the definer

The rise of China as "a fierce competitor across all product ranges" will define winners and loses in the region, it says.

"Competitiveness is not a problem for China, nor is there yet a troubling excess of capital inflows into China, despite continuing buoyancy," BIS Shrapnel notes.

This means China is unlikely to change soon its loosely fixed exchange rate regime, leaving Hong Kong with a major problem because of its peg to the U.S. dollar.

"The Hong Kong dollar, hard-wired to the U.S. dollar, is wildly uncompetitive against the Chinese renminbi," it says, warning Hong Kong faces price and wage deflation, and fiscal cutbacks.

BIS Shrapnel sees Asia's third-largest economy, South Korea, growing at an average rate of 5.5 percent until 2012. But it says political uncertainties may hold back the gathering economic momentum there.