Growth in China is set to surge this year as the global financial crisis fades, and policymakers will need to consider tightening measures to prevent potential overheating of the economy, according to one of the forum reports commissioned by the ADB.

The report, Impact and Policy Responses - People’s Republic of China, noted that China had come through the crisis unscathed thanks to past structural reforms and swift policy actions, including the introduction of a massive RMB 4 trillion renminbi fiscal stimulus package. With the global economy recovering, and indicators such as loans and private investment on the rise, growth in China is set to expand sharply in 2010.

However, the report also cautioned that a continuation of stimulus measures now in place would soon need to be balanced against the necessity of heading off any potential threat of an asset price bubble and inflation.

“No country has responded as effectively and as resolutely to the crisis as China has. With the global economy recovering and with China's growth now surging, there may be a need for change in policy settings," said the report.

The risk for the economy from maintaining extraordinarily high level of policy stimulus however has also got to be considered, it added.

To head off the threat of overheating, policymakers should consider macroeconomic tightening measures, such as reining in lending and raising the actual cost of funds. They should also allow the exchange rate to return to the path of gradual appreciation seen between July 2005 and mid-2008.

Further, the ADB says China needs to continue addressing structural issues in its economy to enable it to move away from excessive dependence on investments and exports. Such adjustments will allow the economy to move up the value chain and become more resilient in the face of future global shocks, the report said.

India’s economy is poised for a solid recovery in 2010 as the global financial crisis fades, but policymakers need to address inflation and the widening fiscal deficit to buffer it against the impact of future global shocks.

The ADB report, Impact and Policy Responses - India, said that the Indian economy has emerged from the crisis relatively unscathed and quickly regained growth momentum, thanks to its own stimulus actions, past reforms, banks’ limited exposure to troubled parts of the global financial system, as well as India’s robust domestic consumption.

The report, prepared by the Centennial Group International, noted that India’s gross domestic product in the third quarter of 2009 grew a robust 7.9% from the year earlier, and consumer confidence also rose strongly, while indicators such as the OECD Lead Indicator on growth and the Dun and Bradstreet Business Optimism Index for India have been trending up.

Offsetting these positive developments were signs of an increase in inflation and a worsening trade deficit in the latter part of 2009. In addition, the nature and extent of the global recovery remained fragile and uncertain, with developed markets such as the US and Europe yet to show evidence of a sustainable and private sector-led economic turnaround.

The report said that India was fortunate the crisis was not protracted, which would have tested the government’s ability to continue fiscal stimulus measures for a long period, and potentially compromised its efforts to boost the economy.

Moving forward, India will have to try and improve its fiscal position through more disciplined fiscal management, said the report.

"Subsidies need to be streamlined or replaced by more targeted measures and a new fiscal management framework should rectify shortcomings of the Fiscal Responsibility and Budget Management Act (FRMBA) of 2003," noted the report.

To build greater resilience to withstand future crisis, India will also need to provide fast acting social ‘stabilizers’ to help poor communities. This could include quick support for workers laid off as a result of a recession. On the monetary policy front, policymakers should make the consumer price index the primary indicator of inflation, instead of the current two-tier measurement system, which leads to inconsistencies and confusion.

In other parts of South Asia, the report recommends wide-ranging measures to shore up the resilience of economies’ such as expanding the diversity of exports, reducing fiscal and current account deficits, cutting banks’ bad loans, and lowering dependence on imported oil.

Rest of Southeast Asia

Southeast Asian economies are recovering faster than expected from the global economic crisis, but in the longer term will need to make financial, fiscal and structural adjustments to buffer themselves against future shocks.

The ADB report, Impact and Policy Responses - Indonesia, Philippines and Thailand, noted that key developing economies in the region were initially hurt by the sharp slump in demand for exports and outflows of foreign capital that emerged during the crisis. But they have been able to rebound relatively quickly, aided by both their own internal actions such as stimulus packages, and the swift action taken by developed countries to avert a prolonged slump. Overseas remittances also provided a cushion, which reduced the impact of the crisis. The report particularly points to the much greater resilience of most Southeast economies compared to the 1997-98 Asian financial crisis.

Indonesia was able to put in place swap lines and other financial support arrangements to restore investor confidence, thanks to policy measures taken since 1997. Record prices received for commodities in the years preceding the slump also helped provide a savings buffer for rural households. At the same time, the report said the sharp outflows of foreign capital and the fall in value of the rupiah in late 2008 could have hurt the country badly if the domestic economy was not as resilient and if steps had not been taken globally to boost investor confidence.

“It is fair to say Indonesia came perilously close to a financial crisis in late 2008 and remains vulnerable to financial shocks so the financial dimension of the economy still requires policy attention,” the report noted.

With the economy recovering, the report says policymakers should look to exit the accommodative monetary policy taken in response to the crisis, as it could stoke inflation. But this needs to be carefully timed. At the same time, it is important that structural reforms be accelerated, particularly in the infrastructure sector, while poorly targeted fiscal subsidies should be replaced with targeted cash transfers.

In the Philippines, prospects for 2010 look relatively good with domestic factors such as rebuilding work in the wake of two devastating typhoons in 2009, and national elections, likely to fuel growth. Remittances from its millions of overseas workers played a vital role in cushioning the country from the worst effects of the crisis, but in the long run, the report said it will have to reduce its reliance on this income source, and look to diversify the economy.

Thailand’s export-driven economy is also starting to rebound as global demand begins to recover, although domestic political concerns are likely to remain a drag. An absence of inflationary pressure and low resource utilization gives the authorities scope to maintain loose monetary policy for now, but in the longer term the country will need to rebalance its economy, putting greater emphasis on domestic demand to drive growth.