Risk Factors from China, Japan Could Imperil Entire Asia-Pacific Economy

The IMF warned on April 27 (local time) that the rapid slowdown of the Chinese economy and the failure of Japan’s Abenomics are the two biggest risks of the Asia-Pacific economy.

The organization published economic outlook reports by region on this day and estimated the Asia-Pacific region’s annual growth rate for this year at 5.4 percent, 0.2 percentage points up from a year earlier. “The region is expected to record a growth rate of 5.5 percent in 2015 as well to continue its stable growth,” it explained, adding, “Asian countries have gone through economic reforms for greater resistance to external shocks, and they will keep spearheading the growth of the global economy.”

Still, the IMF did not forget to point out that Japan and China, the two pillars of the regional economy, could pose a significant threat in that unfavorable signs from China could lead to a severe recession on the real economy side if compounded by a domestic financial crisis taking the form of bad debts and shadow banking estimated at dozens of trillions of yuan. It also warned that this could deliver a staggering blow to its major trade partners such as Korea, Japan, Australia, and Taiwan.

The Wall Street Journal recently reported that trust goods worth US$420 billion come to maturity in China this year to increase the possibility of default. “The financial system of China will be put to test from May this year, when the size of the maturity starts to skyrocket,” it said. According to China Trustee Association data, the combined size of trust goods, one of the typical examples of shadow banking products, reached 11.7 trillion yuan as of the end of last year, more than quadrupling in just four years.

Another risk factor is the possibility of the failure of Japan’s economic policy against 15-year-long deflation. “Prime Minister Shinzo Abe made a good start in monetary easing and fiscal expansion for economic stimulation, and the consumer prices and growth rate are on the rise alike,” the IMF remarked in the report, continuing, “However, questions remain if it will lead to sustainable growth and the eradication of deflation.”

According to a recent simulation conducted by the IMF, Japan’s economic growth rate for 2014 could fall down to 4.0 percent in the worst case if a strong yen, increase in long-term interest rates, and drop in real wages (i.e. the failure factors of Abenomics), interact with each other.