Tài liệu DEVELOPMENTS KEY ECONOMIC AND PROSPECTS IN THE ASIA-PACIFIC REGION 2008 pdf

This year’s report highlights the fact that developing economies in the Asian and Pacific region are estimated to have grown over 8 per cent in 2007.. Rates of economic growth and inflat

IN THE ASIA-PACIFIC REGION

2 0 0 8

PROSPECTS DEVELOPMENTS KEY ECONOMIC

AND

ESCAP is the regional development arm of the United Nations and serves asthe main economic and social development centre for the United Nations inAsia and the Pacific Its mandate is to foster cooperation between its 53members and 9 associate members ESCAP provides the strategic linkbetween global and country-level programmes and issues It supportsGovernments of countries in the region in consolidating regional positions andadvocates regional approaches to meeting the region’s unique socio-economicchallenges in a globalizing world The ESCAP office is located in Bangkok,Thailand Please visit the ESCAP website at www.unescap.org for furtherinformation.

The shaded areas of the map indicate ESCAP members and associate members.

This publication was prepared by the Poverty and Development Division ofESCAP For further information on publications in this series, please addressyour enquiries to:

Director

Poverty and Development Division

Economic and Social Commission for

Asia and the Pacific (ESCAP)

United Nations Building

Rajadamnern Nok Avenue

Bangkok 10200, Thailand

Fax: (662) 288-1000, 288-3007

E-mail: escap-pdd@un.org

escap-publicationsoffice@un.orgWebsite: www.unescap.org

ECONOMIC AND SOCIAL COMMIS SION FOR ASIA AND THE PACIFIC

United Nations

ESCAP

New York, 2007

KEY ECONOMIC DEVELOPMENTS

AND PROSPECTS IN THE

ASIA-PACIFIC REGION

2008

United Nations publication

Sales No E.07.II.F.28

Copyright © United Nations 2007

All rights reserved

a copy of any publication that uses this publication as a source

No use may be made of this publication for resale or any other commercialpurpose whatsoever without prior permission Applications for such permission, with

a statement of the purpose and extent of reproduction, should be addressed to theSecretary of the Publications Board, United Nations, New York

KEY ECONOMIC DEVELOPMENTS AND PROSPECTS IN THE

ASIA-PACIFIC REGION

2008

Key Economic Developments and Prospects in the Asia-Pacific Region 2008 is

the third publication in an annual series that provides an end-of-year report on

the region’s economic performance in a rapidly changing global and regional

environment This year’s report highlights the fact that developing economies in

the Asian and Pacific region are estimated to have grown over 8 per cent in

2007 The economic powerhouses of China and India continue to drive regional

growth, with added impetus coming from the fast-growing Russian Federation

The outlook for 2008 is robust, with developing economies projected to grow

by 7.8 per cent However, the risks to the 2008 projections are increasingly

tilted to the downside The full effect of the unravelling of the United States

subprime mortgage problem has yet to be seen A significant slowdown of the

United States economy and further turmoil in financial markets, as a result,

cannot be ruled out Thus far, the region has coped successfully despite

financial market instability, muted external demand and appreciating currencies

Good macroeconomic fundamentals in the region will provide the policy space

to adapt to a possible worsening of the external environment

Nonetheless, as the report highlights, policymakers in the region should

care-fully watch out for financial market volatility in the coming months Policy

measures put in place to address rapidly appreciating regional currencies,

overheating in asset markets and burgeoning foreign reserves have been

effective in some cases but not so in others These policies may not be

adequate to weather external shocks The region needs urgently to get back

on the unfinished agenda of building strong and deep financial markets that

can accommodate such shocks with ease It is my hope that this year’s report

will serve as a wake-up call for policymakers across the region to put financial

sector reforms high on their agenda

Ravi RatnayakeDirector

Poverty and Development Division

FOREWORD

The Key Economic Developments and Prospects in the Asia-Pacific Region

2008 was prepared under the overall guidance of Ravi Ratnayake, Director,

Poverty and Development Division A team led by Shamika Sirimanne, Chief,Socio-economic Analysis Section, comprising Shuvojit Banerjee and SomchaiCongtavinsutti prepared this report The comments and inputs from EugeneGherman, Alberto Isgut, Muhammad H Malik and Amornrut Supornsinchai arenoted with appreciation Staff analysis was based on data and informationavailable up to the end of October 2007 All graphics work was done bySomchai Congtavinsutti The logistics of processing and administrative actionwere handled by Metinee Hunkosol, Anong Pattanathanes and WoranutSompitayanurak Contributions from the Editorial Unit and other divisions in theESCAP secretariat are noted with appreciation

ACKNOWLEDGEMENTS

Page

Foreword iii

Acknowledgements iv

Abbreviations viii

I Asia-Pacific undaunted by global turbulence 1

Growth spurt of Japan stutters 3

China seeks growth with sustainability 4

Domestic demand cushions slower exports across the region 4

Floods in South Asia devastate lives 6

Consumption buoyant in Central Asia but high energy prices present challenges 6

Inflation contained 7

Oil reaches record highs 9

Inflation a major worry for China 10

Weaker export performance 11

Regional firms are becoming global players 11

Sovereign wealth funds offer risks and rewards 13

II Key issue on the watch list – the economic impact of capital-market volatility 15

Impact of the United States subprime fallout is still limited 15

Currency appreciation remains the core challenge 18

Measures to help exporters not effective 19

Reserve accumulation is having an adverse impact on the real sector 19

III 2008 forecast – domestic demand cushions blow to growth 22

Cautious monetary policy 24

Coping with a United States slowdown 25

3 Rates of inflation of developing and developed economies

in the ESCAP region, 2006-2007 8

4 Selected nominal commodity prices, 2006-2007 8

5 Nominal and real oil prices, 1970-2007 9

6 Movement of exchange rates for selected developingESCAP economies, 2007 17

7 Major holders of foreign reserves in the Asian andPacific region, 2006-2007 20

8 Money supply index for selected developing ESCAPeconomies, 2006-2007 20

9 Real GDP growth forecast for selected developingeconomies in the ESCAP region, 2007-2008 22

10 Consumer price inflation for selected developingeconomies in the ESCAP region, 2007-2008 24

11 Current account balance for selected developingeconomies in the ESCAP region, 2007-2008 25

1 Rates of economic growth and inflation of selected developing

economies of the ESCAP region and North and Central

Asian economies, 2005-2007 2

2 Current account balance as a percentage of GDP of selected

developing economies of the ESCAP region and North

and Central Asian economies, 2004-2007 12

3 Price/earnings ratios in Asia and the Pacific and international

equity markets, 2007 17

TABLES

ADB Asian Development BankCIS Commonwealth of Independent StatesCD-ROM compact disk read-only memoryCPI consumer price index

EIU Economist Intelligence UnitFAO Food and Agriculture OrganizationFDI foreign direct investment

GDP gross domestic productIMF International Monetary FundOECD Organisation for Economic Co-operation and DevelopmentOPEC Organization of Petroleum Exporting Countries

UNICEF United Nations Children’s Fund

ABBREVIATIONS

I ASIA-PACIFIC UNDAUNTED

BY GLOBAL TURBULENCE

Sources: ESCAP, based on national sources; IMF, International Financial Statistics (CD-ROM) (Washington, D.C., IMF, July 2007); ADB, Key Indicators of Developing Asian and Pacific Countries 2007 (Manila, ADB, 2007); website of the CIS Inter-State Statistical Committee,

<www.cisstat.com>, 6 October 2007; and ESCAP estimates.

Notes: Rates of real GDP growth for 2007 are estimates Developing economies (including the Central Asian countries) comprise the

developing economies of the region, and the calculations are based on the weighted average of GDP figures in 2004 United States dollars (at 2000 prices).

Figure 1 Rates of economic growth of developing and developed economies in the ESCAP region,2006-2007

Developing economies of the region

East and North-East Asia

North and Central Asia South and South-West Asia

South-East Asia Developed economies of the region

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Percentage

2006 2007

Developing economies in the ESCAP region are set to record an impressive

8.2 per cent growth rate in 2007, just ahead of the 8.1 per cent rate achieved

in 2006 (see figure 1) The growth was achieved despite a challenging

international environment of financial market instability, muted external demand

and appreciating currencies The economic performance was backed by

strong domestic demand which countered a weakening in exports in many

countries The region’s economic powerhouses, India and China, led the

expansion, while energy-exporting countries of Central Asia, and in particular

the Russian Federation, made significant contributions Together, China, India

and the Russian Federation accounted for more than two thirds of the growth

of developing economies in Asia and the Pacific At the same time, the

region’s developed economies grew at 2.2 per cent in 2007, unchanged from

the previous year

Asia-Pacific economies are well prepared to manage continued uncertainty in

the external environment over the coming months The region’s main strength

lies in healthy macroeconomic fundamentals enabling countries to adopt

sup-portive fiscal and monetary policies amid significantly declining export growth,

financial market volatility or inflationary pressures due to rising oil prices

China and India continue to be the outstanding drivers of regional and globaleconomic growth, despite attempts to cool down those economies China isestimated to have raised its already blistering pace of GDP increase to 11.5per cent in 2007 over the 11.1 per cent seen in 2006, while India slowed to astill-robust 9 per cent growth rate in 2007 (see table 1).

Table 1 Rates of economic growth and inflation of selected developing economies of the ESCAP regionand North and Central Asian economies, 2005-2007

Real GDP growth Inflation a

2005 2006 2007 b 2005 2006 2007 b

Sources: ESCAP, based on national sources; IMF, International Financial Statistics (CD-ROM) (Washington, D.C., IMF, July 2007); ADB, Key Indicators of Developing Asian and Pacific Countries 2007 (Manila, ADB, 2007); website of the CIS Inter-State Statistical Committee,

<www.cisstat.com>, 6 October 2007; and ESCAP estimates.

a Changes in the consumer price index.

b Estimates.

c Based on data for 38 developing economies representing more than 95 per cent of the population of the region (including the Central Asian countries); GDP figures at market prices in 2004 United States dollars (at 2000 prices) have been used

as weights to calculate the regional and subregional growth rates.

d The estimates for these countries relate to fiscal years defined as follows: fiscal year 2006/07 = 2006 for India and the Islamic Republic of Iran; and fiscal year 2005/06 = 2006 for Bangladesh, Nepal and Pakistan.

The last few years have seen the emergence of the Russian Federation as a

potent growth performer, with growth rates exceeding 6 per cent annually since

2003 The country has increased its share in global output by 20 per cent in

the last 10 years and in 2007 became the world’s eighth largest economy in

terms of purchasing power parity The Russian Federation saw its GDP growth

increase significantly to 7.5 per cent in 2007 over the 6.7 per cent growth in

2006

East and North-East Asia maintained its position as the fastest-growing

subregion in Asia and the Pacific This performance was overwhelmingly due to

the dynamism of China, with most economies in the subregion experiencing

somewhat reduced growth North and Central Asia experienced rapid and

broad-based growth from energy exports and domestic demand supported by

energy revenues South and South-West Asia benefited from another year of

dynamic, though slightly lower, domestic demand-led GDP growth South-East

Asia experienced the lowest growth rate of all the subregions, as

export-dependent economies grappled with slowing United States demand and

appre-ciating currencies

Growth spurt of Japan stutters

In contrast to the robust performance of other major economies in the region,

Japan has recently shown signs of a slowdown Japan has yet to fulfil the

expectations of becoming an alternative growth engine for the region to

counteract the slowdown of the United States economy Economic growth in

the second quarter contracted slightly owing to weak export performance,

while then recovering marginally in the third quarter The importance of the

export sector ties the economic performance of Japan closely to the growth

prospects of its trading partners, particularly the United States Domestic

demand is not providing support Residential investment has been restrained

Capital investment, an important GDP driver at the beginning of 2007, also

slowed in the second quarter, while improving somewhat in the third quarter

Private consumption, which constitutes 55 per cent of GDP, has continued to

remain muted over the past few quarters Although company profits are

growing, weak wage growth has ensured that consumers are reluctant to

spend While unemployment has reached its lowest rate in nine years,

new employment has so far been concentrated in low-wage industries and

part-time employment

Weak domestic demand has led to inflation in the economy remaining close

to zero for the year Sluggish increase in consumer prices and concerns

about the fallout of the subprime crisis have prevented an increase in

interest rates despite concern about asset price rises The real estate market

in Japan has seen rapid price increases in recent years, boosted by foreign

institutional buyers Prices in prime areas of Tokyo rose by 30-40 per cent in

2006 and real estate investment trusts (J-REITs) have also performed

strongly.1

1 Financial Times, “Alarm raised over Japan real estate”, 6 September 2007.

Japan has yet

to fulfil the expectations

of becoming an alternative growth engine for the region

“

”

China seeks growth with sustainability

China continues to be beset by its inability to rein in its superchargedeconomy China saw growth accelerate from 11.1 per cent in 2006 to anestimated 11.5 per cent this year Investment and net exports continue to bethe main drivers of GDP growth The contribution of investment to GDP growthincreased from 34.4 to 37.6 per cent, while net exports increased their sharefrom 25.6 to 28.9 per cent

The need to cool down the economy has become more pressing during theyear, as inflation rose to a 10-year high in August (year-on-year) and theShanghai Stock Exchange doubled in value Property prices have also surged,with housing prices in 70 cities jumping by 8.2 per cent in August comparedwith a year earlier; prices rose in July around 20 per cent year-on-year inShenzhen and over 10 per cent in Beijing.2

The destabilizing effect of the current structure of growth on the environment isbecoming more apparent Figures published in 2007 indicate that air pollution,especially in large cities, is leading to a higher incidence of lung disease,including cancer and respiratory system problems Water pollution is alsocausing growing levels of digestive system cancer and diarrhoea, particularly inchildren under-five years of age.3 Food security has become increasinglyaffected, as arable land has been lost to other uses such as manufacturingand construction The country has lost 8 million hectares, or 6.6 per cent of itsarable land, in the past decade.4

Furthermore, the risk of a protectionist backlash from major economies as aresult of the country’s booming exports is an ongoing concern The Govern-ment of China has responded by pledging to eliminate export tax rebates for

553 highly energy-consuming and resource-intensive products, such as cement,fertilizer and non-ferrous metals Rebates for another 2,268 products, consid-ered liable to trigger trade friction, are to be slashed from 8-17 per cent to 5-

11 per cent.5 These measures have yet to bear fruit, as export growthcontinues to accelerate

Domestic demand cushions slower exports across the region

The year 2007 has seen domestic demand emerging as the engine of growthfor many countries in the region while export performance has subdued (seefigure 2) The key elements of strong domestic demand have been acceleratinginvestment and private consumption growth

2 Bloomberg, “China raises rates for fourth time to cool inflation”, 21 August 2007 and “China raises rates for fifth time to cool economy”, 14 September 2007.

3 World Bank, The Cost of Pollution in China: Economic Estimates of Physical Damage

(Washington, D.C., World Bank, 2007).

4 China Daily, “Measures taken to increase arable land”, 8 August 2007.

5 China Daily, “Tax rebates removed, cut to curb exports”, 20 June 2007.

The need to

cool down the Chinese

economy has become

more pressing during

the year

“

”

Most economies in East and North-East Asia experienced a marginal slowdown

in 2007 However, the better-than-expected performance over the course of the

year was mainly due to robust domestic demand Hong Kong, China; Taiwan

Province of China; and the Republic of Korea all witnessed improving

consumption and investment in 2007 Exports to China also helped to mitigate

the effects of slowing demand in the United States

South and South-West Asia recorded robust economic growth of 7.5 per cent, a

pace of increase marginally slower than in 2006 South Asian countries have

enjoyed strong domestic demand, while their merchandise trade deficits have

widened due to imports of oil and consumption goods India continues to

display buoyant consumption and investment as a consequence of four years of

dynamic economic growth Exports were weak in Pakistan but the country has

benefited from surging fixed investment and private consumption Record levels

of workers’ remittances in Bangladesh have supported private consumption

Economic growth in South-East Asia has held up well despite the challenging

international environment faced by several economies Weakness in the United

States market as well as currency appreciation against the United States dollar

has hurt exports in many countries The Philippines however has seen strong

domestic demand on the back of record remittances and Malaysia has

experienced strong private and public investment as well as private

consump-tion The exports of Indonesia have held up well in the commodities sector and

Figure 2 Contribution of domestic demand to GDP for selected developing Asian economies,2006-2007

Sources: Calculated based on CEIC Data Company Ltd.; and EIU, Country Forecast (London, 2007).

Note: Figures for 2007 are estimates.

Pakistan Indonesia Malaysia

Philippines Singapore Thailand

Private consumption Investment Public consumption Net exports

Weakness in the United States market

as well as currency appreciation has hurt exports in many South-East Asian countries

“

”

consumption responded positively to declining interest rates Singapore hasbenefited from domestic demand bolstered by new major commercial construc-tion projects, a thriving financial sector and rising real wages and propertyprices The outstanding growth of Viet Nam is increasingly focused on thedomestic economy, with rising demand for manufactures and services as well

as growing investment by foreign enterprises Thailand remains the weakestperformer among its neighbours, as its exports have exhibited vulnerability inthe current external environment, and domestic demand has failed to take upthe slack amid continuing political uncertainty

Floods in South Asia devastate lives

The devastating floods in South Asia in 2007 have killed more than 4,000people and left millions homeless.6 Those affected most have been the poorest

of the poor, living in rural communities in Bangladesh, India and Nepal Losseshave been estimated to be at least $1 billion and major outbreaks of water-borne diseases such as diarrhoea, typhoid and hepatitis have occurred There

is potential for food and other commodity prices to rise, further exacerbatingthe hardships of those affected Agricultural production will be affected due tothe loss of animals and unfavourable crop prospects following damage torecently planted crops While the impact on overall GDP is likely to be small,there may be risks for some export industries, such as the garment industry inBangladesh

Consumption buoyant in Central Asia but high energy prices present challenges

North and Central Asia grew at 8.1 per cent in 2007, compared to 7.6 per cent

in 2006 Countries benefited from the increase in domestic consumption as aconsequence of buoyant energy prices Rapid growth has been broad-basedacross countries Kyrgyzstan saw the most dramatic increase in economicgrowth, from 2.7 per cent in 2006 to 8.5 per cent in 2007, driven largely byconstruction and services The Russian Federation also saw its GDP growthrising significantly, with high domestic demand from energy export revenuesleading to buoyant construction and manufacturing sectors The goodperformance of Turkmenistan was driven by exports and construction, whileUzbekistan benefited from significant investment in its export and servicesectors in 2007

Countries across the subregion nevertheless continued to grapple with theeconomic downside of booming energy receipts Inflation remains high acrossthe subregion, as a consequence of the liquidity generated by buoyant energyexports and energy-related investment inflows Kazakhstan, while perhaps thebest example of a country investing its energy surpluses effectively, has seeninequality widen along with dynamic growth The economy remains insufficiently

6 UNICEF, “Millions still affected by floods in South Asia”, 21 September 2007 (Press Release).

Those affected

most by devastating

floods in South Asia

have been the poorest

of the poor

“

”

diversified with manufacturing suffering from a highly appreciated exchange

rate Turkmenistan similarly suffers from high inequality as well as persistent

poverty Investment in energy production has stalled and the lack of technical

skills presents a challenge to the sector

Inflation contained

Inflation has generally been contained across the region (see figure 3)

Currency appreciation for most economies has moderated the impact of

high international oil and food prices Monetary policy has varied according

to inflationary concerns The Republic of Korea and Taiwan Province of

China have been raising interest rates while Malaysia has kept them steady

In contrast, Indonesia, the Philippines and Thailand have been easing rates

Rising food prices have put upward pressure on inflation in developing

coun-tries in the region, and internationally Councoun-tries are faced with surging prices

for basic food imports, such as wheat, corn and sorghum (see figure 4) Wheat

prices reached a record $8.86 per bushel in September, an increase of 60 per

cent during the year Corn prices, at nearly $4 a bushel, are almost double

their level in 2005 While the rise in prices is partly due to the strong demand

from developing countries, the depreciation of the United States dollar (in

which most internationally traded food is priced) and increasing oil prices, one

of the major factors driving food price increases in 2007 has been the biofuel

industry’s appetite for grain These demand effects have been exacerbated by

a supply contraction in 2007 due to weather-related factors among major food

exporters Drought in Australia in 2006 affected the country’s wheat crop;

flooding in China in 2007 curtailed wheat and rapeseed production and dry

weather in Europe lowered grain yields

Rising food prices, most sharply for pork, spurred the record inflation in China

in 2007 The increase in the CPI in August of 6.5 per cent year on year was

led by food price inflation of 18.2 per cent Pork prices in China, the world’s

largest producer and consumer of pork, rose 49 per cent in August compared

with a year earlier While pork prices have risen mainly because of internal

factors, particularly disease, and reduced supply due to low prices in the

previous year, external factors have also been important, such as the rise in

international animal feed prices The share of feed in the total cost of raising

swine is half for large farms and slightly less for smaller farms.7

Food prices are a bigger inflation concern than oil prices for many countries in

the region This is because food accounts for a far higher proportion of

consumer spending, as seen from the weighting of food in the consumer price

index calculation For example, in the Philippines food accounts for 50 per cent

of CPI as opposed to 7 per cent for energy In India, food represents 46

per cent of CPI; in Indonesia, 42 per cent and in China, 33 per cent

Food price inflation also disproportionately affects low and average income

households

7 China National Development and Reform Commission, Department of Price, Cost of Production

Estimates, <www.chinaprice.gov.cn>

One of the major factors driving food price increases has been the biofuel industry’s appetite for grain

“

”

Source: IMF, International Financial Statistics (CD-ROM) (Washington, D.C., September 2007).

Figure 4 Selected commodity prices (nominal), 2006-2007

Maize Sorghum Wheat Coconut oil Soybeans Soybean oil

Sources: ESCAP, based on national sources; IMF, International Financial Statistics (CD-ROM) (Washington, D.C., IMF, July 2007); ADB, Key Indicators of Developing Asian and Pacific Countries 2007 (Manila, ADB, 2007); website of the CIS Inter-State Statistical Committee,

<www.cisstat.com>, 6 October 2007; and ESCAP estimates.

Notes: Inflation rates refer to changes in the consumer price index Inflation rates for 2007 are estimates Thirty-eight developing

economies (including the Central Asian countries) comprise the developing economies of the region, and calculations are based on the weighted average of GDP figures in 2004 United States dollars (at 2000 prices).

Figure 3 Rates of inflation of developing and developed economies in the ESCAP region, 2006-2007Developing economies of the region

East and North-East Asia North and Central Asia South and South-West Asia

South-East Asia Developed economies of the region

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Percentage

2006 2007

(January 2006 = 100)

Oil reaches record highs

Oil prices continued their volatile but upward trend over 2007 By early

November the price for Brent crude reached the new record $93 a barrel In

real terms, oil is at its most expensive level in more than 20 years However, it

is still below the 1979 real oil price (see figure 5)

The recent surge in oil prices was triggered by the strong demand for oil, declining

oil inventories, bad weather in the Gulf of Mexico and continued geopolitical

uncertainties in the Middle East The weakening United States dollar has added to

the intensity of the price hike United States inventories reported in September

2007 stood at 322.6 million barrels, their lowest level in eight months In response

to the increasing demand, for the first time in two years the Organization of

Petroleum Exporting Countries agreed to increase its production, from November

20078 However, the increase has been judged by the market to be an insufficient

measure for pushing prices down Oil-producing countries are treading a difficult

middle path They do not wish to encourage a global economic slowdown through

high oil prices but are also wary of increasing supply excessively

So far the impact of high oil prices on the region has been limited for several

reasons that were discussed in the Key Economic Developments and Prospects

in the Asia-Pacific Region 2006 First, the appreciation of regional currencies

against the United States dollar has muted the impact of rising oil prices

“”

8 Financial Times, “OPEC agrees to lift oil production”, 11 September 2007.

Second, the continuous rise in oil prices in recent years has been drivenmainly by strong global demand, not supply disruptions as had occurred in thepast An increase in oil prices regardless of the sources of shocks would lowereconomic growth and lead to inflation However, the magnitude of the adverseeffect on growth is far lower in terms of a demand-driven price rise than onewhich is caused by a disruption in supply – where physical shortage of oilleads to a direct disruption in overall economic activity Third, inflationaryexpectations are lower worldwide, compared with those related to previousoil shocks Finally, the oil intensity of consumption and production, particularly

in major economies, is significantly lower than in the 1980s, reducing theeconomic impacts of a higher oil price

Nonetheless, for those countries that are facing overheating pressures, such asChina and India, the rising oil prices have produced an added challenge incontaining inflation For low-income oil importers, in addition to inflationaryconcerns, addressing deteriorating external balances would be a challenge

Inflation a major worry for China

There have been growing fears of overheating in the two major emergingeconomies of the region, China and India China is witnessing its highest level

of inflation in 10 years While supply-side factors through the global increase inoil and food prices have also contributed to the inflation jump, demand-sidepressure continues through increases in the money supply Currency manage-ment coupled with booming export receipts has led to the unabated injection

of money into the domestic economy Loan growth continues to advance at arapid pace The Government of China has taken several measures to controlinvestment and speculation in the stock and property markets During 2007,interest rates have been raised five times in order to control fixed assetinvestment, while bank reserve ratios have been raised nine times To discour-age speculation activities in property markets, interest rates on second homesand commercial real estate have been raised, as have the minimum downpayment requirements for property purchases Deposit rates have beenincreased more than lending rates, and the tax on interest income wasreduced to discourage the withdrawal of deposits by citizens to fund assetmarket purchases Household bank deposits have been on a downward slide,falling $5.5 billion in August compared with the previous month However, theeffects of the cooling measures are still to be seen in the economy asinvestment growth has declined only marginally

India has fought a pitched battle with inflation in 2007 After rising rapidly over thepast few quarters, inflation in India has been brought down by a combination oftight monetary policy and currency appreciation Interest rates have been raisednine times since October 2004 to reach 7.75 per cent in July 2007, while thereserve ratio of banks has been lifted five times to reach 7.5 per cent byNovember In response, prices and credit growth declined considerably over thecourse of the year The benchmark wholesale price index inflation rate eased to3.1 per cent by mid-October from its peak of 6.4 per cent in early April; the ratehas been below the central bank’s target of 5 per cent since June.9

9 Reserve Bank of India, Mid-Term Review of Annual Policy for The Year 2007-2008, 30 October 2007.

India has fought

a pitched battle with

inflation in 2007

“ ”