Source: The Financial Times                  Date: 01 October, 2010

China’s average annual rate of economic growth over the next two decades will fall to little more than half the current level as its ability to sustain huge investment declines, according to the Asian Development Bank. Such a slowdown would have a dramatic effect on China’s place in the world, significantly delaying the moment at which its economy surpasses that of the U.S. as the world’s largest, having overtaken Japan as the second largest earlier this year.

Jim O’Neill, head of global economic research at Goldman Sachs, forecast in 2009 that China could overtake the US by 2027. However, that prediction relied on China achieving growth of “close to 10 percent for many years”. In its first official attempt to quantify China’s long-term growth prospects, the ADB said on Tuesday that its baseline projection was just 5.5 percent on average for the 20 years to 2030, compared with 9.4 percent between 1981 and 2007 and a forecast 9.6 percent this year.

Growth could average 6.6 percent if China implemented reforms to reduce its dependence on investment and increase productivity through improvements in education, property rights and research and development, the ADB said. Jong-Wha Lee, ADB chief economist, said many other countries in Asia would face the same growth problem because their rapid rates of economic growth over the past three decades had been underpinned by unsustainable levels of investment. “We don’t think these countries can go back to the previous levels of strong growth that they had before the global financial crisis,” he said.

The ADB report forecasts that South Korea’s long-term economic growth will fall from an average of 6.3 per cent to a baseline projection of 3.9 per cent, Taiwan’s from 6.1 per cent to 3.1 per cent, Indonesia’s from 4.8 per cent to 4.4 per cent and India’s from 5.5 per cent to 4.5 per cent.

In the shorter term, the ADB said Asia’s V-shaped recovery from the global financial crisis was gathering pace in spite of economic weakness in the U.S. and Europe. In its Asian Development Outlook 2010 Update, which includes the long-term forecasts, the ADB said that Asia excluding Japan would grow by 8.2 per cent this year, well above last year’s 5.4 per cent. The development bank said in April that this year’s growth was likely to be restricted to 7.5 per cent. It maintained its forecast for 2011 at 7.3 per cent.

The bank raised its forecasts for all its sub-regions, with south-east Asia predicted to grow at 7.4 per cent this year, East Asia at 8.6 per cent, south Asia at 7.8 per cent and central Asia at 5.1 per cent.