Asia's challenges and prospects for the next decade

GIC's annual thought leadership event, GIC Insights, was held here on 15 September 2017. It saw 110 prominent global business leaders deliberate long-term issues relevant to the international business and investment community. The theme was Asia's Evolving Role in an Uncertain World, and topics included Asia's Challenges and Prospects over the Next Decade, Artificial Intelligence for Traditional Industries and A Long-Term Future in an Uncertain World.

Below is GIC's excerpt from from the topic Asia's Challenges & Prospects for the Next Decade:

In examining Asia's economic prospects for the next decade, we first need to recognise that Asia has different dimensions - India, for instance, is a highly insular economy, while smaller Asian countries are more export-oriented. China has a strong independent economy, but exerts tremendous influence on global markets. The second thing we need to do is examine Asia within the context of the broader global picture. From the global standpoint, we are currently in a transition period where after eight years of stimulation, most major central banks are contemplating tightening. As a result of a prolonged period of easing, the current environment features favourable conditions for further asset price and currency appreciation in Asia. In the longer term, however, the underlying drivers of long-term growth rates remain favourable for Asia, and 5 of the top 8 growth economies in the next decade remain in Asia. However, risks remain because the tightening of monetary policy has not been sufficiently priced in by the markets, while abundant liquidity has been, and there is a risk of over-tightening of monetary policy and a rise in real rates, which may inadvertently trigger downturns in Asia.

In this new global environment, China remains a key lynchpin; although inflation might have been muted by technology and robotics adding to the labour supply, another reason why inflation has not grown is due to over-capacity in China. However, a closer look reveals that China's economy is about to undergo structural changes. In the past, China's growth was limited by investments, which represented close to 50% of its GDP. It had the highest growth rate in the world because it also had the highest saving rate in the world, which enabled it to invest more than any other country at any stage in their industrialisation process. But this is no longer a sustainable economic model. To understand why, China only needs to look at the experience of its closest competitor, the United States. In 2008, during the financial crisis, the US capacity utilisation rate dropped to 78%, and unemployment reached double-digit levels at 10%. Today, China is in a similar position as America in 2008; its capacity utilisation rate is 75%, but rather than facing an unemployment crisis, China has a labour shortage. This means that China must shift its growth model to consumption, which currently accounts for only 35% of its GDP (compared to the US at 72%). Furthermore, China's falling savings rate and the rapid ageing of its population all mean that the investment-led model is simply not sustainable. China must instead increase consumption to 50%, and capitalise on changing consumer trends in a population that is now looking for more experiential goods, such as tourism.

A key challenge for China will be to sustain its current growth rate of 5-6% as it makes the transition to a consumption-led model; the consumption growth ratio is lower than investment-led growth, which has spill-over effects on the rest of the economy. This means that China will have to live with a lower economic growth rate. To maintain existing levels and successfully transit to a consumption-led model, China needs to accelerate reform of its state-owned enterprise (SOE) sector, which is a major source of inefficiency in its economy. Although reform has slowed in recent years, there is evidence that the government remains committed to making this a priority; at the 18th Party Congress, SOE reform was placed on the agenda, and the top leadership holds the view that the sector must reform according to a market-oriented approach. Following the upcoming 19 th Party Congress, it is likely that there will be more consistency between the party and government agendas, making it easier to restructure the state-owned sector along the lines of a mixed economy.

Elsewhere in Asia, there is still plenty of room for urbanisation and the expansion of the middle class, particularly in the economies of Indonesia, India, Vietnam, Cambodia, and Myanmar. The region remains committed to globalisation and openness, and regional integration remains a key focus, with financial and manufacturing networks growing more extensively, and intra-regional tourism expanding. Outside these frontier economies, the developed countries of Singapore, Taiwan, and South Korea will continue to remain relevant, as their cities will continue to drive innovation, and serve as test-beds for solving policy dilemmas.