After many decades of driving regional growth, the economy of the People’s Republic of China (PRC) is now slowing down, and this is likely going to have a noticeable effect on the world economy and especially globally integrated economies in developing Asia.
On the other hand, countries like India, which is less integrated in the global economy for the moment, will likely remain insulated from the slowdown.
In last week’s supplement  to the Asian Development Outlook (ADO) 2015, ADB’s annual flagship economic publication released in March, we projected that the PRC economy will grow by 7% this year and 6.8% in 2016, 0.2% less than our original forecast, mainly due to weak external demand from high-income countries, a shrinking working age population and rising wages.
A clear sign of the growth slowdown in the PRC is relatively low investment growth, as investment in real estate was held back by a large inventory overhang, while manufacturing investment was hit by weaker sales growth and excess capacity in some industries. To address these problems and lift overall productivity and growth, the world’s second largest economy needs to implement reforms that improve resource allocation, especially reducing the dominance of state-owned firms in the economy and allowing high-productivity private sector firms to obtain necessary funds more easily.
Given its size and close links with its neighbors through regional and global value chains, as well as through its outbound foreign direct investment, slower growth in the PRC is likely to impact economic activity throughout the rest of Asia.
A sluggish Chinese economy—along with slower-than-expected growth in the United States—led us to also cut our 2015 growth forecast for developing Asia to 6.1%, down 0.2 percentage points. Beyond the region, a 0.4% reduction in Chinese GDP growth could slash global economic growth by 0.1%. This is quite significant for a single country. These figures clearly show how growth deceleration in the PRC matters enormously to the rest of the region.
The impact of the PRC’s slowdown, though, will be felt in some parts of developing Asia more than in others.
East and Southeast Asia, for instance, will be hit harder because both have extensive economic links with the PRC, and the magnitude of the effects will depend on the depth and speed of the Chinese slowdown and a given country’s economic links with the PRC. South Asia has more limited economic links to the PRC, so India has less to worry about, let’s say, than Indonesia, Singapore or Thailand, three major regional economies where we also cut growth forecasts.
Since part of the reason for the slowdown is the rise in wages, some emerging economies may actually benefit from weaker economic performance in PRC. Bangladesh and Myanmar—where labor costs are still low—are working to increase their world market shares in labor-intensive industries that the PRC used to dominate but is now gradually exiting. There is an opportunity for both countries if they are able to upgrade their infrastructure and make their overall investment climate friendlier to both domestic and international investors. But one country that should withstand the impact of the present situation is India.
We are maintaining our forecast of 7.8% growth for India in 2015 as the economy is less reliant on external demand, and Indian companies are less integrated with firms in China and comparatively do not sell much in global markets. A healthy monsoon season is expected to boost agriculture, new investment has been increasing for a full fiscal year now, and the manufacturing sector is starting to recover thanks to improved indirect tax collection. These factors so far outweigh risks such as delayed legislation on land acquisition for industry and to implement a uniform goods and services tax.
India is the second largest developing economy in Asia, and about 30% percent of the Chinese economy in terms of GDP in constant dollars. If it continues to deliver high growth, India can also have a sizable impact on growth prospects for the rest of developing Asia. Indonesia, the third largest developing country in Asia, is also hoping to ratchet up growth through better infrastructure and policy reforms. Will it be enough to counter the slowdown in the PRC? We shall see.
This article was first published by ADB Development Blog .