China?s economic growth has been marked by periods of cyclical surges in economic activity and inflation, followed by periods of retrenchment. The current cycle (2002?04) bears some of the characteristics of previous overheating cycles, such as high GDP growth, rapid credit growth, and high investment rates. As a result, credit growth has slowed. In current circumstances, a soft landing, which would maintain underlying growth momentum, appears achievable. In addition to the early action to rein in credit and investment growth already initiated by the authorities, these include the consistent implementation of monetary tightening actions to restrain the upswings, contain inflation, and mitigate eventual non-performing loans problems; introducing greater interest rate liberalization and hard budget constraints for state-owned enterprises to support the effectiveness of monetary policy; and increasing the use of indirect monetary policy instruments rather than administrative measures to improve resource allocation and reduce the severity of the cycles. Moreover, there is scope for fiscal policy to play a more supportive role by using strong growth in revenue to reduce the overall fiscal deficit.

Given China?s rapid integration with the global economy, the prospect of a slowing in growth and imports has raised concerns about the impact this would have on other countries. For example, China?s share of global trade (6 percent) has tripled since the early 1990s, revealing much stronger trade linkages and the prospect that changes in China?s growth could have significant repercussions. Import growth would also slow from 40 percent in 2003 to a projected 30 percent in 2004 and 24 percent in 2005. Despite the slowdown in Chinese import growth, the growth of global imports is projected to remain strong, given the generally positive prospects in industrial countries and other emerging markets. But what if there is a sharper slowdown in China? Simulations were conducted to assess the impact on other countries in the region of an additional one-time 10-percentage-point decline in the growth of China?s imports for domestic use arising from a further slowdown in domestic investment. Such a decline would roughly correspond to a 7 percent decline in China?s overall imports and is estimated to be consistent with an initial drop of 51/2 percentage points in real investment growth.

The impact on the rest of Asia, after allowing for multiplier effects, is estimated to be a 0.4 percentage point drop in GDP growth. The impact varies considerably across the economies of the region, with declines in growth rates ranging from near zero to as high as 0.6 percentage point, depending on the importance of China as an export destination. Asian newly industrialized economies are most affected, with their GDP growth slowing by 0.6-percentage point (see the table).

Results suggest that such a slowdown could reduce world GDP growth by about 1/3 of a percentage point. As a result, a substantial drop in the growth of exports to China would still leave countries in the region with relatively robust export growth rates provided that growth momentum in industrial markets is sustained.

<B>Nitish BENIMADHU

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