HONG KONG • Weaker growth in China this year is expected to cause a slowdown in the rest of Asia, the Asian Development Bank (ADB) said yesterday as it became the latest major body to revise downwards its forecasts for the world's No. 2 economy.
It also warned central banks to prepare for a Federal Reserve interest rate rise, with many nations already seeing huge capital outflows as dealers look for safer US investments. The report comes as markets have been hit by extreme volatility driven by fears over the Chinese economy - and its leaders' management of it - after last month's surprise devaluation of its currency.
"The combination of a moderating prospect in China and India, together with delayed recovery of advanced countries, weighed on our forecast for the region as a whole," said ADB chief economist Shang-Jin Wei, who presented the report at the Foreign Correspondents' Club in Hong Kong yesterday.
In an update to its flagship Asian Development Outlook released in March, the bank said growth in the region would hit 5.8 per cent this year and 6 per cent next year. Its growth forecasts in March were 6.3 per cent for both years.
South-east Asia was bearing the brunt of China's slowdown, with growth in the region this year put at 4.4 per cent, before rising to 4.9 per cent next year. Singapore's outlook was revised from 3 per cent to 2.1 per cent this year and from 3.4 per cent to 2.5 per cent next year.
Inflation in the developing Asia region was forecast to ease further, partly due to lower global commodity prices.
Mr Wei said the overall outlook for the region was "still positive" but had been impacted by capital flow reversals and weakened commodity prices for exporters, partly related to the China slowdown.
"Developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation," he said.
However, the ADB tipped China - the main driver of global economic growth - to expand 6.8 per cent this year, instead of the 7.2 per cent previously estimated, following a stream of weak indicators including on trade, inflation, investment and consumer spending. It is below China's official target for the year of "about" 7 per cent.
Mr Jurgen Conrad, head of the ADB's economic unit, told reporters in Beijing that the revision was "mainly due to the delayed recovery in industrial countries reducing export demand".
Last week, the Organisation for Economic Cooperation and Development cut its 2015 growth forecast for China by 0.1 percentage point to 6.7 per cent.
The ADB also lowered forecasts for India to 7.4 per cent from 7.8 per cent, weighed down by the slow pace of reform by the new government and weak external demand.
The bank urged regional central banks to move now on monetary policy to prepare for a US rate hike, which Fed chief Janet Yellen has said will come before year-end.
"To counter the impacts of a US rate rise, monetary policy authorities in developing Asia will need to find a balance between stabilising the financial sector and stimulating domestic demand," the report warned.