East Asia economy seen to grow in 2006

East Asia, excluding Japan, will grow by 7.2 percent next year, up from 7.1 percent in 2005 on the back of a rise in demand for electronics products, the Asian Development Bank (ADB) said yesterday.

The Manila-based ADB said individual performances are likely to vary significantly, with China to slow to slightly below nine percent after estimated 9.3 percent growth in 2005.

Excluding China, emerging East Asia is expected to post average growth of 5.3 percent in 2006, up from 4.6 percent this year.

South Korea will likely accelerate to five percent from four percent in 2005, with Singapore rising to six percent from 5.2 percent.

"With (China) a major trading partner for many countries in emerging East Asia, increasing (Chinese) imports should provide additional impetus for these economies," the ADB said.

China’s growth is likely to continue to be driven by strong gains in private consumption while investment will slow but to still robust levels.

The ADB said the forecasts are subject to four major risks — a disorderly adjustment of growing global payment imbalances, a sharp upturn in the global interest rate cycle, higher oil prices and a possible bird flu pandemic.

It noted that a continued tightening of monetary policy and fiscal consolidation were needed to sustain strong growth and at the same time keep inflation in check.

"Greater exchange rate flexibility could be utilized more to help contain inflation and at the same time rebalance the sources of growth away from exports to domestic demand," said Masahiro Kawai, head of the ADB’s economic monitoring unit.

The report welcomed the July 2005 shift by China and Malaysia from a pegged exchange rate against the dollar to a managed float against a basket of currencies.

It pointed out, however, that the yuan-dollar exchange rate has not varied much since the one-time revaluation of the yuan by 2.1 percent July 21.

It said greater flexibility would reduce the need to accumulate foreign exchange reserves and so partly help an orderly resolution of global payment imbalances.

"Building on the 21 July policy shift, (China) needs to adopt greater exchange rate flexibility. There is merit in loosening the yuan’s tight link to the US dollar as it would foster greater exchange rate flexibility in Asia as a whole and provide a greater opportunity for collective rate movements vis-à-vis the US dollar," the report added. — AFP