Since 2001, China has been a locomotive for growth in East Asia, and its continued prosperity and economic stability will influence economic fortunes elsewhere. Several measures have been introduced to restrict the growth of overall demand-especially investment-which is running ahead of production capacity, and to ensure that the financing of future growth is both efficient and sustainable.

However, the challenges are daunting, given the paucity of macroeconomic instruments and the fragmentation of responsibilities for economic management. With better economic coordination, and given the measures already implemented, it should be possible for China to maintain a growth rate of 7.7 percent during 2004, with a small external surplus and inflation of 2-3 percent.

Fueled by growing exports, low interest rates, and high investment in China, Vietnam, and Thailand, East Asia's economy is expected to grow by more than 6 percent in 2004, the strongest since the beginning of the global slowdown in early 2000, according to the latest East Asia and Pacific Regional Update, the World Bank's twice-yearly look at the region's economies.

"With the strong recovery in the United States and Japan, increased demand for East Asian exports and the long-awaited rebound in the high-tech sector, the outlook for the region is very positive both for the big countries and for the smaller ones," said Regional Vice President for East Asia and Pacific Mr. Jemal-ud-din Kassum. At the same time, Mr. Deepak Bhattasali, Lead Economist for China added that "China's imports are likely to slow as a result of efforts to cool down the economy, so the other East Asian countries will need to look to domestic sources of demand to maintain growth."

"By the end of 2003, the low and middle-income countries of the region were growing at a combined rate of 7.6 percent, their fastest rate since 1996. This strong recovery to pre-crisis levels of growth also bodes well for the region's poor, with an estimated 49 million moving above the $2 a day line in this latest upsurge," Mr. Kassum said.

Global investment in information and communications technology and high tech electronics has rebounded and is rapidly growing, to the benefit of many Asian economies. This recovery will likely further growth in intra-regional production and trade networks, centered on China, which is taking in a growing number of its neighbors' exports.

China still driving the region, but for how long?

Long the driver of regional growth, China's imports surged 40 percent in 2003, and figures from the first quarter of 2004 show continued growth, fueled by demand for inputs to its manufactured exports, mostly from China's neighbors. Intra-regional trade still accounts for around 70 percent of the growth in exports of East Asia's developing economies, as has been the case for the past three years. Again, the growth of export to China accounted for 50 percent or more of the growth of exports of several East Asian countries. But this trend will surely slow as China cools from its current rapid growth rates. The Chinese authorities are working hard to slow the country's pace of growth to a more manageable level. To do this, they must balance the need to continue creating jobs and reforming the economy while keeping the economy stable and slowing down excessive investment, the report says. Just what effect this slow down will have on China's neighbors remains to be seen.

"Although it is true that slower growth in China would hurt other economies in the region, our view is that the impact would be modest," said Mr. Homi Kharas, Chief Economist for the East Asia and Pacific Region. "Even a 10 percent reduction in the growth of China's imports would result in a loss of less than 1 percent of gross domestic product (GDP) in Korea and Taiwan (China) and less than half of one percent GDP in a country like Thailand. And if this slowdown took place in 2004, it would be offset by an acceleration of Japanese imports from the region and higher global trade growth.

"The real risk to the region," Mr. Kharas noted, "comes not from slower growth in China but from a hard landing, which will take skillful and coordinated policymaking to avoid."

In another positive sign for the region, domestic and foreign investment are also showing signs of recovery. Net portfolio flows to six large regional economies - China and the five post-crisis economies, Indonesia, Korea, Malaysia, Philippines and Thailand - are estimated to have jumped to around $33 billion from a net outflow of $9 billion in 2002. FDI into China has remained stable at about 4 percent of its GDP since 1990, while Korea, Malaysia, Philippines, and Thailand are receiving about 2 percent of GDP or about the same as the world average.

Increasingly other regional economies are also looking forward to solid investment growth. Looking forward, a combination of low interest rates, availability of credit, and higher corporate profits and productivity are an impetus to an upturn in investment spending around the region.

Foreign direct investment (FDI) inflows to six main East Asian economies are estimated at about $60 billion in 2003, about $1.5 billion higher than in 2002. But of this total, about $53.5 billion went to China and only about $6.5 billion to the other five economies, Indonesia, Korea, Malaysia, Philippines, Thailand, whose combined share of FDI continues to fall while China's share rises.

"In the present recovery growth and poverty reduction are being more widely shared around the region, thanks in part to rising commodity prices, which are boosting incomes in several of the low-income, commodity exporting countries," said Lead Economist Mr. Milan Brahmbhatt, principal author of the Regional Update. Oil and primary commodity prices for cotton, rice, rubber, metals, and edible oils like palm oil rose 10 to 20 percent in 2003 and have continued to rise in early 2004.

Higher commodity prices will benefit some of the smaller economies in the region, in particular, like Mongolia and Papua New Guinea as well as some of the larger ones like Vietnam and Indonesia. Higher prices will, on the other hand, tend to eat into the income of the more developed commodity importing economies, but so far not by enough to damage the overall recovery.

"To ensure that these windfalls truly benefit countries over the long term, particularly in the poorest countries, revenues must be managed well, which historically has not been the case," Mr. Brahmbhatt concluded.

The special focus section of the report looks at the lessons from China, Indonesia, Korea, and Malaysia in reducing poverty on a large scale, the subject of the upcoming Shanghai Poverty Conference, May 25-27, and an ongoing global dialogue on ways to accelerate poverty reduction.

(China.org.cn April 20, 2004)