Global Economy
East Asian Economies Diverge

Jahyeong Koo and Dong Fu take a look at business cycles in China, Korea, Japan and Taiwan.

Business cycles of major East Asian economies have recently shown diverse patterns. China and Korea have gained strength in domestic demand and have shown robust growth. Japan and Taiwan have stabilized but remain sluggish due to heavy reliance on external demand.

China
China’s economic expansion continued in 2001, although decelerating to 7.3 percent from 8 percent in 2000. Now it seems to be picking up speed again. Second quarter 2002 saw GDP growth tick up to 8 percent year-over-year, following 7.6 percent in the first quarter. In the first six months of 2002, real retail sales increased 10.1 percent. Fixed investment increased 21.5 percent, with the government continuing to lead the private sector. Meanwhile, post-WTO trade liberalization boosted exports by 14.1 percent and imports by 10.4 percent. Foreign direct investment grew 18.7 percent.

The United States remains China’s largest overseas market. According to Chinese data, exports to the United States grew 19.3 percent year-over-year in the first half of this year, while imports decreased 3.3 percent. This imbalance is reflected in the U.S. trade statistics, which show a record-breaking deficit of $43.1 billion with China during this period. The recent softening of the dollar has no significant impact on bilateral trade because the Chinese yuan remains pegged to the dollar.

The Chinese central bank lowered the key interest rate (the one-year deposit rate) in February, the eighth consecutive rate cut since 1996. However, deflationary pressures are still a serious concern, with the CPI dropping 0.8 percent year-over-year in the first six months (Chart 1).

Chart 1

Korea
The overall resiliency of domestic demand has been evident in Korea recently. Even amid the severe decline of exports in 2001, domestic demand held up. It has further strengthened amid the export recovery since late 2001 (Chart 2). This feature of Korea’s economy contrasts with those of Japan and Taiwan, where private consumption was weak until recently.

Chart 2

The financial restructuring that followed the 1998 financial crisis has taken effect. The unemployment rate fell to 3 percent in June, the lowest since 1998. Real GDP growth is expected to top 6 percent this year. In July, Standard & Poor’s upgraded the rating on dollar-denominated Korean government bonds from BBB+ to A, and the Korean country-risk premium dropped to 100 basis points from 155 basis points in January—a sign of robust economic growth.

Inflation has been well under control within the range of the inflation target of 3 ±1 percent. The CPI was up 2.1 percent year-over-year in July, but down 0.1 percent from June. The Korean won has tended to synchronize with the Japanese yen as the markets have perceived that the Korean government would willingly intervene to maintain its competitiveness against Japan in the export markets (Chart 3).

Chart 3

Japan
Japanese GDP growth in the first quarter of 2002 reached 1.4 percent (5.7 percent annually). Household consumption grew 1.6 percent, while exports surged 7.1 percent due to the strong dollar and recovery of Southeast Asian economies. But growth in residential and nonresidential investment remained negative (Chart 4). This pattern has continued through the second quarter. Strong export growth helped to keep the unemployment rate at 5.4 percent, down from the peak of 5.6 percent last December.

Chart 4

Deflation has weakened recently in Japan. The CPI fell 0.7 percent year-over-year and 0.1 percent month-over-month in June. Even though the Bank of Japan pumps cash into the financial system, it cannot create enough credit, reflecting structural problems in the banking sector. The broad money measure grew only 3.5 percent, while base money has risen 25 percent since last year.

The yen appreciated considerably against the dollar due to concerns about the U.S equity market and accumulated U.S. trade deficit. The exchange rate reached 115 yen/U.S. dollar in July. However, since late July, the yen has softened, following the U.S. equity market rebound in August (see Chart 3).

Taiwan
Taiwan suffered its first GDP contraction in four decades, falling 2.2 percent in 2001, largely due to the bust in the U.S. high-tech market. Unemployment shot over 5 percent and has stayed there.

This year, the economic outlook is slowly turning brighter. Year-over-year real GDP growth climbed upward, reaching 1.2 percent in the first quarter. It further improved to nearly 4 percent in the second quarter, mainly due to net exports (3.6 percent), private consumption (1.4 percent) and inventory investment (0.2 percent). But gross fixed-capital formation remained negative (Chart 5). At the same time, cross-strait economic ties with mainland China continue to strengthen. Officially recorded investment into mainland China rose 12.9 percent in the first six months .

Chart 5

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