Asia Pacific Economic Outlook: China, Indonesia, Japan, Thailand

China appears to be headed for a soft landing. That's good news after much anxiety earlier in the year. Specifically, in the spring of 2010, the authorities started the process of tightening monetary policy in order to slow growth and defuse inflationary pressures. In response, global financial market participants, by pushing down equity prices, demonstrated concern that China might be headed for a hard landing. That is, they were worried that government policy would be too blunt and that the economy would slow down excessively. One reason for global anxiety about the rate of deceleration in China is that the country has become an engine of growth for the world - a role that used to be the sole province of the United States. Rising domestic demand in China leads to increased imports, thereby stimulating exports in other parts of the world including the United States, Germany and many commodity-exporting emerging countries. As domestic demand decelerates, there could be a negative impact on global output. Instead, recent numbers suggest that rather than a hard landing, the Chinese economy is slowing gradually. This was evidenced by a small increase in the purchasing managers index (PMI) in August, the first rise since April. On the other hand, inflation in August rose to 3.5 percent year over year, although not unexpectedly. The rise in inflation is not surprising as the impact of monetary tightening on inflation will likely take time. Thus, a reasonable expectation is that inflation will continue to rise before starting to decline sometime in 2011. The global economy will probably be better off if China undergoes a soft landing rather than a future crisis. And China may be better off as well. History shows that China tends to face increased social unrest and wrenching economic change during periods of inflation. Clearly the Chinese authorities want to avoid such an occurrence.download