Paul Davidson

USA TODAY

China’s economic slowdown has hammered commodity prices and rattled global markets amid the prospect of less booming demand in the world’s second-largest economy. Markets have recovered but further volatility is lurking as China transitions its economic pillars from exports and investment to domestic consumption. Takehiko Nakao president of the Asian Development Bank, which finances infrastructure projects in the region, discusses the risks posed by China and other emerging markets with USA TODAY economics reporter Paul Davidson at the International Monetary Fund meetings in Washington.

Q: Is the stock market volatility caused by China’s troubles now behind us?

A: China is not as bad as many people believe, but it’s too early to make a conclusion.

Q: Why did you say China is in better shape than people think? Will its economic slowdown continue?

A: We don’t think there will be a hard landing for several reasons. One is the transition takes time but consumption is strong. The service sector is growing very well. And they are making a lot of efforts and reforms. Also, there is still room for fiscal and monetary expansion (by increasing government spending and lowering interest rates). The risk is if they do it, in a sense it’s supporting growth today but it might delay (structural reforms) and may cause difficulty in the future.

Q: What are the main reasons for China’s slowdown from double digit growth a few years ago to a healthy but far lower estimate of 6.5% this year?

A: They are now facing a declining working age population, and the migration from rural centers to urban centers is coming to an end. The wage is now increasing and (the country) is becoming less competitive globally. They’re also unwinding the previous very large investment. So there is excess capacity (in the form of) unsold residences, but also in the manufacturing sector, equipment, high-speed trains and public works.

Q: What kind of reforms is China making?

A: They want to let private banks lend more to (small- and mid-sized businesses). Before they were letting state-owned banks lend to (state-owned enterprises, many of which are now being shut down). There is also reform of the labor market to support (migrant workers moving from rural areas to the city) with more education and social welfare.

Q: Is it difficult to make these reforms?

A: To close state-owned enterprises, it’s a tough job. It means laying off the people. So they want to keep the businesses as much as possible. And (increasing welfare payments for migrant workers) takes time. The government cannot be too radical. The population doesn’t like to (pay higher taxes).

Q: How is the government promoting more consumer spending?

A: Wages are higher. And they want to facilitate consumer credit to buy bikes and cars, air-conditioners. Once the middle class and the economy start spending more on these things, it’s very difficult to stop the momentum. It already has started.

Q: Are you concerned by China’s very high debt, which is more than 250% of GDP if you include government, corporate and household debt?

A: If GDP is growing at a rate of 6.5% or so, the relative scale of that can be managed. So what is important is to have policies to take care of non-performing loans.

Q: There’s also concern about large capital flows out of China as the economy grows more slowly and some investments shift to Treasury bonds as U.S. interest rates rise.

A: I don’t say that I’m not concerned at all but although (the government) liberalized the flow of capital, there are still remaining regulations on capital outflows. They don’t need to rush. It’s better to gradually liberalize.

Q: Aren’t there fears that when the Federal Reserve continues to raise interest rates, capital outflows from China and other emerging markets will increase as investors move money to higher-yielding Treasuries?

A. Generally, there is concern about it but the market more or less digested the Federal Reserve policy. And (the rate increase) is not so rapid anyway.

Q: The IMF this week pointed out that emerging markets, including many in Asia, are struggling because the prices of the commodities they export have plummeted. How big of a threat is this to global growth?

A. Many Asian countries are growing very robustly based on their own demand and their own productivity. So I’m not so pessimistic. Commodity prices can be lower than before and that’s good news for import countries, including Pakistan and India.