Asia’s Rebalancing Act

SEOUL – Rapid economic growth in China undoubtedly benefits the rest of Asia. Indeed, strong Chinese demand has supported its trading partners’ export-led growth for much of the past three decades. But now, faced with a slowdown in China and significant downside risks there, the rest of Asia must abandon over-reliance on export-oriented development strategies and strive to ensure stable and sustainable growth domestically and regionally.

China’s vulnerabilities and risks – stemming from property bubbles, shadow banking, and local-government debt – have triggered concerns about a crisis not only there, but also in neighboring Asian countries. Some, indeed, now predict a Chinese banking or fiscal disaster; others predict long-term stagnation equivalent to Japan’s lost decades.

These “hard landing” scenarios are extreme. But the road ahead is bumpy and uncertain. No one can guarantee that Prime Minister Li Keqiang’s attempts to achieve deleveraging and structural reform will succeed. Moreover, external shocks, policy mistakes, and political instability could disrupt even the best-laid plans.

In any case, China’s stellar growth record cannot be sustained. Even if it manages a “soft landing,” annual output growth will slow to 5-6% in the coming decades. Standard growth theory predicts “convergence” of per capita GDP: a fast-growing country will eventually encounter difficulty maintaining high rates of labor mobilization, capital accumulation, and technological progress.