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World Bank Cuts 2022 East Asia Growth Outlook

World Bank Cuts 2022 East Asia Growth Outlook

Wednesday, 28 September, 2022 - 10:00
People shop for fruits and vegetables at a market in Hong Kong. (AFP)

Economic growth in East Asia and the Pacific will weaken sharply in 2022 due to China's slowdown, but the pace of expansion will pick up next year, the World Bank said on Tuesday.

The Washington-based lender said in a report it expected 2022 growth in the East Asia and Pacific region, which includes China, to slow to 3.2%, down from its 5% forecast in April, and the previous year's growth of 7.2%.

The weaker forecast was due mainly to a sharp slowdown in China, caused by its strict zero-COVID rules that have disrupted industrial production, domestic sales and exports, the World Bank said.

China, which constitutes 86% of the 23-country region's economic output, was projected to grow 2.8% this year, a significant deceleration from the bank's previous forecast of 5%. In 2021, China's economy expanded 8.1%, its best growth in a decade.

For 2023, the world's second-largest economy was seen growing at 4.5%.

Another risk to the region's outlook was aggressive interest rate hikes that central banks across the world are undertaking to combat soaring inflation. These have caused capital outflows and currency depreciations, the report stressed.

In this context, profits at China's industrial firms shrank at a faster pace in January-August, as strict COVID restrictions and a deepening property slump weighed on domestic demand, adding to uncertainties about the faltering economy.

Industrial profits fell 2.1% in the first eight months of 2022 from a year earlier, after a 1.1% drop logged in January-July, according to data from the National Bureau of Statistics (NBS) released on Tuesday.

Industrial profits data covers large firms with annual revenues above 20 million yuan from their main operations. The bureau did not report standalone figures for August and July.

Separately, China’s central bank on Monday announced fresh steps to slow the pace of the yuan’s recent depreciation by making it more expensive to bet against the currency with derivatives, ramping up support for the currency as it slides toward the weakest level against the dollar since the 2008 global financial crisis.

The People’s Bank of China (PBOC) said Monday it’ll impose a risk reserve requirement of 20% on currency forward sales by banks.

Since August, the central bank has sought to limit the yuan’s losses through its daily reference rate as well as demanding that lenders set aside more foreign exchange as reserves, Bloomberg reported.

The decline of the yuan is accelerating as divergence grows between a dovish PBOC and an aggressively hiking Federal Reserve.

China’s push-back mirrors that of Japan, with both seeking to limit the damage from their weakening currencies, with the risks that further declines may lead to ever more capital outflows and drag down the region.

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