Ms. Utsunomiya – Good morning. Greetings also to those who are watching us online. I am Keiko Utsunomiya, External Relations Officer from the External Relations Department of the International Monetary Fund. With me here is Mr. Jerry Schiff, Deputy Director of the Asia and Pacific Department; Mr. Anoop Singh, Director of the Asia and Pacific Department; also Mr. Masahiko Takeda, Deputy Director; Mr. Markus Rodlauer, Deputy Director; and Mr. Hoe Ee Khor, also Deputy Director of the Asia and Pacific Department. Mr. Singh will give brief opening remarks before taking questions from the floor.
The Director of the Asia and Pacific Department (Mr. Singh) – …on how we see the outlook for Asia, let me just mention at the start that we are going to be launching our Asian Economic Outlook in Asia very soon, and hopefully I might see some of you in the region as we go into much more detail on our assessments. Let me make three points at the start of my remarks.
As you have seen from press conferences this week and the World Economic Outlook WEO, Asia is clearly continuing to lead the three-speed global recovery. Having said that, we are looking at risks and they are shifting. In the short term, we are looking carefully at financial imbalances to see if they are building up in some countries. Of course, there is the clear reality that corporate and banking sector balance sheets in Asia are really still very sound. Beyond that, over the medium term, we are looking at the priorities in rebuilding policy space so as to ensure that foundations are laid for longer-term prosperity. Some countries in Asia might face what some call the “middle-income trap” and it is important that policies seek to avoid that.
Okay, briefly on these points. As I said, Asia is leading the three-speed global recovery. You have seen these numbers. You have seen that Asia is going to grow closer to 5 3/4 this year. If you look at Emerging Asia, it is well above that, over 7 percent this year. Of course, there is some variation on this in Asia.
Also important for us as we look at Asia is the ASEAN economies. They are growing at close to 5 1/2 percent and some frontier countries are growing even higher, about 6, 6 1/2, such as Cambodia, and Myanmar. For the Pacific Island countries, partly given their lower connectivity with the region, their growth is somewhat lagging.
The main point I want to make on the near-term outlook being so strong in Asia despite the external situation, which, of course, is improving and that helps Asia a lot, the main point is that domestic demand in Asia has been more of a key driver of the Asian growth than we could have expected a couple of years ago. Consumption and private investment have been robust across Asia, supported by a number of factors; of course, also, by relatively easy financial conditions.
What we are also learning is that the spillovers within Asia are positive and large. As you look at the data available for trade within Asia, especially among the ASEAN countries, you see that demand has picked up and there is more demand within ASEAN economies. The final demand is coming more in consumer products within ASEAN and less simply from the supply chain.
Let us talk briefly about China and Japan. In China, we recognize that the latest data do show a somewhat lower growth rate during the first quarter than expected, but in our view growth appears to be on track. Our projections remain at 8 percent this year, even picking up for next year. You have seen that some of the indicators in the first quarter have been rather strong. In Japan, our view is that a policy stimulus should help sustain growth around 1 1/2 percent for this year. In both cases, there are positive spillovers to the region from China and Japan.
Inflation is not an issue. In most countries, not in every country but in most countries, inflation should remain generally within the comfort zones of the targets of central banks.
Let us move now on to risks. They are certainly narrower and they are more balanced than they were six months ago. As I said, external risks have certainly come down and therefore we are looking more carefully at regional risks. In the near term, we are looking carefully at trends in credit ratios in relation to output gaps. We are seeing in many countries that credit ratios and output levels are fairly clearly moving above trends of course, fueled by easy global and domestic financial conditions. Therefore, there is a risk that balance sheets could come under pressure. But, as I said, corporate and financial sector balance sheets in Asia are generally sound.
There are a number of other risks of significance: regional risks, global risks, geo-politics. They would be disruptive, in part because Asia continues to have a highly integrated supply chain network, but the growing dependence on regional demand helps mitigate some of these potential risks. So, policymakers face a delicate balancing act, guarding against the potential buildup of financial imbalances while ensuring adequate support for growth.
So, in that context, let me say a few words on the macroeconomic policy stance in countries. These have been accommodative. They have served the region well, given the external risks. But output levels are close to or above trend in many countries, and output gaps have narrowed or have disappeared. Therefore, our sense is that monetary policymakers should stand very ready to respond quickly, decisively, and preemptively to avoid any risks of overheating.
Of course, this point is quite different from country to country within Asia. Let me make a brief point on Japan. In Japan, the new quantitative and qualitative monetary easing policy is clearly welcome, as Japan needs to reach and achieve its domestic goals of ending deflation and raising growth. But, as we have said, and as the Japan authorities have said, it needs to be complemented by ambitious fiscal sustainability and a growth strategy to revive the economy on a sustained basis.
Nevertheless, given that capital has come back to Asia, it is the case that macroprudential measures are playing and will have to play an important role, especially where there has been rapid credit growth in the context of strong capital inflows to ensure these do not put pressure on financial stability.
Asia will be attractive for capital over the medium term, given its growth fundamentals. Therefore, we can expect capital inflows to remain strong over the medium term. The challenge is how do you accommodate this capital coming in. Here, the most important point from my point of view is to ensure that the economic framework directs these capital flows into foreign direct investment rather than just portfolio, to help build infrastructure in areas important for medium-term growth.
In this context, I will also make a related point on fiscal policy. In many countries, as you look at their structural balances, their structural deficits, these are generally now somewhat higher than they were before the global crisis. Asian countries therefore need to rebuild their policy and fiscal space to ensure that infrastructure needs can be adequately and sustainably addressed.
This is closely linked to medium-term issues and that is how you make growth in Asia more inclusive, more sustainable. In this context, the fiscal policy framework is very important. We believe in many countries, especially in Emerging Asia, there is a lot of room to enhance the quality of revenue and expenditure policies, thereby helping make growth more resilient and more inclusive. This is also important for many countries to avoid what some have called the “middle-income trap.”
Thus, to maintain Asia’s growth leadership, many countries have to take reforms across a range of areas, especially strengthening infrastructure investment, but also reforms in goods and labor markets, and for many countries, meeting the challenges for demographic changes that are coming to much of Asia.
So, that is my introduction. The near term looks good. Policymakers are now looking at risks over the medium term. They are trying to ensure that Asia remains a growth leader while making their growth inclusive and sustainable. Thank you very much.
Ms. Utsunomiya – Thank you, Anoop.
Now we will take questions from the floor. We will also welcome questions online as well. Please identify yourself and affiliation.
Any questions, please?
Question – My question is for Mr. Singh.
You mentioned about China’s economy that we should not overreact about the recent data of slowdown. I was just wondering, what do you think is the biggest challenge for China’s economy despite what you said that we should not overreact?
You also mentioned about shadow banking. Do you have your own assessment or measurement about how large is China’s shadow banking?
Mr. Singh – Let me just, on your first point, mention that we just got some information overnight about China’s business sentiment indicator that shows improvement in overall business conditions in April. This has been driven by increases in new orders and production. This is consistent with our sense that growth remains close to 8 percent for this year.
You talked about other issues. I might ask my colleagues to speak more about this. Basically, I think we are at a stage where China, as the President has said, including recently in Haikou—I was recently at the Boao Forum and we heard President Xi Jinping speak. He spoke very comprehensively. He spoke about the need to adapt China’s growth model. He was very clear that China needs to change from its growth model being focused on manufacturing and exports, to being much more focused on what he calls “People Development,” to shift the focus from investment, manufacturing, and exports to consumption, to households. This is a change in the growth model. It involves a whole range of policies. Among those is financial sector reform. We have heard the People’s Bank of China speak very often of how this is a priority for China and for them in the near term. I raise this because you asked about shadow financing, shadow lending. This is clearly something which is being looked at.
On the one hand, it is an indication that financial developments and credit in China are deepening and are moving ahead in a more liberalized environment, but they need also to have full regulation. Therefore, there is concern that this is rising very fast. Overall, the point I will make is that in China recently credit growth has been large and the authorities are trying to moderate it.
Markus, you want to add to that?
The Deputy Director of the Asia and Pacific Department (Mr. Rodlauer) – Shadow banking, let us say nontraditional financing in China has become, of course, very important. As a share of total financial flows, it has risen to almost half; last year it was 40 percent of total intermediation. This year it is probably half. So, it is a very important part of growth, a very important part of China’s story of moving toward more market determination.
At the same time, of course, because it is growing so fast, whenever credit is growing very fast, it bears vigilance because there are issues about credit quality, issues about liquidity risks.
In terms of the overall size, why it is growing very fast in terms of the overall size, our assessment is that it is still manageable. It is still relatively small. The authorities have the margins to control it. But if the very rapid growth were to continue for some time, it would become, of course, larger and larger. So, our job is to point to the risks before they become a problem. I think that is the focus of the authorities at this point.
Question – The World Economic Outlook forecasts India’s growth to be at 7 percent in the medium term, while India is currently going through a phase of slowing growth and a high current account deficit and fiscal deficit is adding to India’s problems. So, where do you get this confidence from or what gives you the confidence that India will return to the 7 percent growth?
Mr. Singh – Let me make a couple of points. You are talking, I guess, more generally about potential growth. Our sense is clearly India has that potential. We have seen, however, a drop in growth in recent years, but we are seeing in recent months a changing sentiment responding to changing policies.
If you look at some high frequency indicators, you will see that a recovery from the low growth in India is beginning. As you know, we are projecting for this fiscal year growth rising to about 5.8. If you look at the calendar year for 2014, we are seeing it already rising to over 6, around 6 percent.
On policies, let me just say that one concern has been the slow rate of project approvals in India. Therefore, I think it is significant that the government has established a Cabinet Committee to accelerate project approvals and deal with this overhang of project requests that have not been approved.
On the other hand, and it is not just India but across Asia, capital is coming in. If you look at India, you will see that the balance of foreign direct investment to other capital has somewhat changed in recent years. The ratio of FDI has gone down a bit. Therefore, it is important for India and other countries that the balance goes back and rises for FDI that is more sustainable. The challenge is to ensure it goes into sectors that are important for growth.
It is in that context that we should look very carefully at what countries are doing in Asia, and recently in India, to improve the attractiveness of FDI and enhance its FDI framework. They have liberalized the FDI regime in a number of areas, including in retail and aviation.
So, overall, there has been reform in accelerating policy approvals, project approvals, liberalizing FDI, and continuing with the commitment for fiscal consolidation. The government is acting on a number of areas. That is why we do believe that potential growth in India could certainly go above where it currently has been.
Question – I have a question about the capital controls. When you think about G3 central banks, they are implementing huge quantitative easing and money flows to emerging markets, especially the countries that are growing fast. What do you recommend, to those countries that are getting portfolio inflows partly in FDI, the policy mix, capital controls or currency intervention? We have not seen currency intervention yet, but I would just like to hear your thoughts about that.
Ms. Utsunomiya – Could you clarify. Is that capital flows in Asia?
Question – In Emerging Asia in general.
Mr. Singh – I talked about this in my opening remarks. A lot has been written on this in recent months. Let me briefly mention there are two ways to see this.
In the short run, yes, there are concerns of capital volatility. In Emerging Asia, capital flows rebounded in the second half of last year, certainly went above previous trends, including in the first quarter of this year, but since then there has been moderation. So, on the one hand, there is the risk of volatility and this volatility is much more pronounced if the inflow is in the form of portfolio and other in the shorter term. So, the challenge for Asia is how to continue to get capital on a sustainable basis.
It is important to recognize that, looking beyond where global monetary conditions presently are, over the medium term, you are going to see emerging markets, especially in Asia, remaining the growth leader. Therefore, we have to expect that capital will continue to flow to emerging countries, especially Asia. That is the reality.
It’s a very simple issue, to my mind. The challenge for Asia is how you shift this, so that capital does not come with volatility in the short run, into short-run speculative or property investments that have caused bubbles and how do you shift that focus into FDI, as I said earlier.
Now, in the short run, you will see that countries in Asia have done a lot in these macroprudential measures, trying to target those flows which could be more sensitive from a shorter-run speculative point of view. They have stayed away from what is called capital controls so far. They have used a number of measures and I think to some extent they are succeeding, but I would say the more important longer-term issue is how to ensure that these flows go into infrastructure in much of Emerging Asia, across ASEAN, including India and South Asia; that the challenge is reorienting the fiscal policy space to build infrastructure and ensuring that this is boosted by foreign capital. That is the challenge.
Let me ask colleagues if you want to add to it.
Mr. Rodlauer – In terms of the individual country’s policy response to portfolio, large-scale portfolio inflows, I think there is not really a one-size-fits-all approach. It depends very much on the actual macro situation of the country, where they are in the policy framework. If there is room to have the traditional macro responses, like, some exchange rate appreciation for a country that may be undervalued or is not overvalued, that is one line of defense. If you have a monetary policy cycle where you can actually tighten, where you can actually loosen and you do not have overheating yet, you can reduce interest rates to keep capital flows outside.
If those macro traditional responses do not work, you may want to shift to macroprudential measures. There is a whole range of capital-based, liquidity-based measures that many countries have done. If that does not work in the end, as we have said, capital flow measures may in the end also be one of the policy tools in the arena as well as currency intervention.
For example, a country like Hong Kong, whose policy framework does not have an independent monetary policy, does not have capital controls, has a very clear fiscal framework, has very clear macro openness, no controls framework, macro-prudential and intervention are the main tools because that is consistent with their framework. So, it really depends on a country-by-country situation.
Question – Also a related question to the previous one. So, given that Japan has just announced a radical monetary easing policy, and we have seen many central banks have also done this, how can we assured that there will be no risk of competitive depreciation?
Mr. Singh – Well, I think on Japan we spoke about this yesterday, and I would say that the main point is that what Japan has done needs to be understood in terms of their own efforts to end decades-long deflation and to revive growth. Therefore, their new monetary framework is integral to this undertaking along with public debt and growth reforms. The ` process aims at raising domestic demand, and the nominal exchange rate could depreciate together with rising domestic demand to raise inflation.
Now, you talk about competitiveness. I do not think this is really a very big issue. In my view, as we look at currencies, we do not see in them any significant misalignments from their medium-term fundamentals. . I think what is crucial right now is for advanced economies to revive their growth that is important for the rest of the world. What we are seeing is part of their effort to do so.
Do you have anything on Japan?
The Deputy Director of the Asia and Pacific Department (Mr. Schiff) – Just a couple of small points. One is that I think your question more generally was about spillovers from the Japanese policy response. Of course, that is an important issue. I think it feeds also into our view that, while the monetary expansion is appropriate and welcome, it needs to be accompanied by structural reforms to raise potential growth and by a number of steps to bring the fiscal situation under control. If they do those things, and if Japan is able to sustain higher growth, then we think that that will be very good for the region as well as for the global economy.
The other small point is that, given that Asia is characterized by this very well-known supply chain, even the impact of a depreciation of one currency has a not so straightforward impact on other countries because, on the one hand, countries compete in third markets, but Japan is also an important supplier of inputs into the supply chain. In that case, depreciation may be helpful for other countries in that supply chain.
Mr. Singh – Let me just make one more comment on Japan. You know that the authorities have indicated that they will, by midyear, announce their growth strategy. It is very important. It is important also that the Prime Minister has recently given some outlines and it is very important to us that he has also highlighted the importance of healthcare and women in the workforce.
There was a paper we had written as staff last year about the gains in Japan of raising women in the workforce. It is interesting that in a recent statement by the Prime Minister, he is highlighting that increasing women in the workforce will be central, key to his growth strategy. So, I think we will be seeing more measures in the coming months.
Question – China is exhibiting enormous excess capacity right now and that has been fueled by a very high investment rate over the last few years, up to 50 percent in some years. Now, much of that investment is going into production that is not being used. It is most obvious in the retail and residential housing sector, where you see unoccupied apartment buildings. You will see it in commercial sectors as well. My two questions are, one, how much is that also playing out in the state-owned enterprise sector? Is there an enormous amount of built-up excess capacity being developed there? The second question is how do you see that being resolved or how do you see it being played out over the next few years? How do they get out of that excess capacity situation?
Mr. Singh – I am going to ask Markus to answer that. The point I make is that this is part of the effort to change the growth model, to change it from it being investment-led. We know that investment in residential housing has been very high in certain parts of China, and it is to change that focus to other areas.
Markus, do you want to add to that?
Mr. Rodlauer – I think it is very clear in the government’s own policy statements that reducing excess capacity and working it off is one of the key parts, and I think rather than just destroying capacity, obviously reorienting the growth model from one that is investment-based that is traditional in China, building out capacity for growth to come and then selling the products abroad or at home.
Now, when you look at the real estate sector, for example, we do, of course know there is excess capacity. I would not take sort of the headlines that come out. We have all seen the recent 60 Minutes report. Those are cases which are not representative of the whole situation in China. There is enormous demand for housing. There is enormous potential for continued urbanization. So, while there is excess capacity, we must not take the headlines at some point as indicative of the general situation.
We have done our own estimate of the capital stock in China and two things come out. On the one hand, there is evidence that if you build it up analytically from the various components—initial stock, investment, depreciation—potential output is about 5 percent higher than actual output. So economy-wide, there is significant spare capacity. At the same time, let us not forget that capital stock per worker in China is somewhere around 10 percent of the capital stock in the U.S. per worker. Again, indicative that there is a tremendous amount of room to raise capital stock further.
In many ways, the issue is not the level but the speed. When you try to catch up very, very fast, there is a risk that you create accidents, bubbles, and misallocation along the line. So, reducing the speed, reorienting the growth model to one that is more consumer-led, I think is the appropriate approach.
Ms. Utsunomiya – Let me take a question online. What are the consequences for Thailand and Asia of the high appreciation of the Thai baht?
Mr. Singh – Well, I think what we are seeing across Asia is part of what we call rebalancing. We are seeing capital coming into Asia; we are seeing currencies appreciating. This is consistent with fundamentals.
Beyond that, if we look at Thailand specifically, we have seen that growth has picked up. Growth has been about 6 last year; it should remain close to 6 percent for this year. From all accounts, if you look at exports, exports remain competitive and export growth has been strong. So, overall I think what we are seeing in Thailand and Asia is part of the process of the implications of rebalancing and the effects on exchange rates.
Question – For the past two days I heard the term “macroprudential measures” many times. Could you specify what macroprudential measures are? Especially for China, what advice will you give for China to address financial stability risks?
Mr. Rodlauer – Generally, we classify macroprudential measures into three types and they have different effects and they have different consequences. The most direct ones are the ones that we call credit-based which try to address directly the amount of credit that is going out from institutions; for example, loan-to-value ratios. You tell a bank that you can only have so many loans compared to the value of the mortgage.
Then we have the capital-based ones which try to fortify the individual institutions to build up capital, to make sure that they have enough buffers in case there was a problem. And then we have the liquidity-based macroprudential measures which make sure that there is enough liquidity buffers in the system, that banks do not have maturity mismatches.
So, all three of those have been quite extensively employed by China as well as its neighbors. We can take Hong Kong as another example, which is trying to fight a property price boom that is there and, given their policy framework, macroprudential measures the main tool they can use to address it. So, we advise countries to use those as much as they can, particularly if their policy framework is constrained, like the one in Hong Kong. We do see that they are effective.
They have different consequences in terms of price signals and resource allocation. We generally think that the price-based measures, like capital-based macroprudential measures, are perhaps the least distortive ones because, again, they are price-based, actinig mainly through the cost of funds for banks. Overall, as I say, China and Hong Kong have used the whole gamut of these measures and they are effective.
Ms. Utsunomiya – If there are no more questions, we would like to conclude our press conference here. I have printouts of the opening remarks here. We will also post the transcript of this briefing online later. As Anoop mentioned, we will be launching the Asia Pacific Regional Economic Outlook on Monday, April 29th, so please mark your calendar. Thank you all for coming.
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