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The World Bank cut its forecast for China’s growth next year, warning that developing countries in East Asia will grow at one of their slowest rates in five decades as U.S. protectionism and rising debt pose an economic strain.
The bank’s bleaker forecasts for 2024 underscore growing concerns about the slowdown in China and its impact on Asia. China’s policymakers have already set one of the lowest growth targets in decades for 2023, about 5 percent.
Citing a series of weak indicators for the world’s second-largest economy, the World Bank said it now expects China’s economic output to grow 4.4 percent in 2024, compared with the 4.8 percent it forecast in April had expected.
It also cut its forecast for gross domestic product growth for developing countries in East Asia and the Pacific, which includes China, to 4.5 percent in 2024 from an April forecast of 4.8 percent, falling short of that for this year year expected rate of 5 percent.
The forecasts show that the region, one of the world’s key growth engines, is expected to reach its slowest pace of growth since the late 1960s, barring extraordinary events such as the coronavirus pandemic, the Asian financial crisis and the global oil shock in the 1970s.
Economists expected China’s recovery from strict pandemic controls to be “more sustained and significant than it turned out to be,” said Aaditya Mattoo, the World Bank’s chief economist for East Asia and the Pacific.
The bank noted that Chinese retail sales fell below pre-pandemic levels, property prices stagnated, household debt increased and private sector investment lagged.
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Mattoo warned that slower growth would continue unless governments, including China’s, embarked on “deeper” reforms in the services sector. But the transition from real estate and investment-led growth has been challenging for many emerging Asian economies.
“In a region that has really prospered through trade and investment in manufacturing. . . The next big key to growth will be reforming the services sector to take advantage of the digital revolution,” he said.
Weaker global demand is taking its toll. Merchandise exports fell by more than 20 percent in Indonesia and Malaysia and more than 10 percent in China and Vietnam compared to the second quarter of 2022. Rising household, corporate and government debt has further dented growth prospects.
The deteriorating forecasts also reflect that much of the region – not just China – is affected by new US industrial and trade policies under the Inflation Reduction Act and the Chips and Science Act.
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U.S.-China trade tensions and tariffs imposed by Washington against Beijing benefited Southeast Asia for years, driving demand for imports to other countries in the region, particularly Vietnam.
But the introduction of the IRA and chip laws in 2022 – measures intended to boost US manufacturing and reduce American dependence on China – have hit Southeast Asian countries. Their exports of affected products to the US have declined.
“This whole region that has perversely benefited from US-China trade tensions [trade] The diversion is now suffering as trade diverges from it,” Mattoo said.
According to the World Bank, electronics and machinery exports from China and Southeast Asian countries such as Indonesia, Vietnam, the Philippines, Malaysia and Thailand fell after President Joe Biden’s protectionist policies took effect.
By comparison, U.S. trade has not declined with countries like Canada and Mexico, which, unlike China and Southeast Asia, are exempt from local content requirements associated with U.S. subsidies.
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“Treatment under these provisions discriminates against countries that are not exempt from the local content requirements,” Mattoo said.
World Bank data assumes a decline in demand due to the general slowdown in global growth affecting all countries.
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Concerned Southeast Asian countries are rushing to fight back. Indonesian companies have criticized the “unfair” exclusion of the country’s critical minerals from a huge US green technology subsidy package.
Indonesia has the world’s largest nickel reserves, which are crucial for producing batteries for electric vehicles. Jakarta is trying to negotiate a provision that would give its mineral exports similar treatment to Canada or Mexico.
Business lobby groups in Vietnam have also argued that the U.S. should extend electric vehicle tax credits to Hanoi, especially after the two countries formally expanded ties this month. The US is Vietnam’s largest market, but shipments fell 19.1 percent from January to August this year, compared with a 13.6 percent increase in 2022.
Additional reporting by Andy Lin in Hong Kong
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