The World Economy in 2016

The slowdown in China, and Malaysia’s failure to undertake structural reform will weigh on the country’s economy in 2016, even as the United States appears to have turned a corner, Jeffrey Cheah Institute President Woo Wing Thye said this week.

“We are now in the middle of a semi-panic,” Professor Woo said of the sharp drop in global stock markets in January. He added that the economic slowdown represented an opportunity for both China and Malaysia to undertake crucial economic reforms.

“Instead of being a passive victim of the disaster that is unfolding, they should shape the future that they will face,” he said in his presentation on the ‘World Economy in 2016,’ organised by the Jeffrey Cheah Institute on Southeast Asia, part of Sunway University.

Concerns about the health of Chinese economy, and oil prices’ slide to less than $30 a barrel, has triggered heavy selling in global stock markets since the start of the year. Banks, whose risky investments in sub-prime mortgages, triggered the last financial crisis in 2008, have warned there might be worse to come.

Professor Woo explained that QE, the “unconventional monetary policy” pursued by the US in the wake of the 2008 crisis was partly to blame for the world’s current economic problems because while it had helped underpin a recovery domestically, it had created financial instability elsewhere. For its part, China was also at fault because it had maintained its stimulus policies for too long, creating a ‘bubble’ of over-capacity in heavy industry.

Also speaking at Sunway, Professor Chung-Ming Kuan of the National Taiwan University and a former economic planning minister in the island’s government, mapped trade links between the world’s major economies in the years since 2004, to show China’s increasing importance not only globally, but regionally.

“In trade terms, China matters the most in Asia,” he concluded. Going beyond trade to address the impact of monetary policy and political relations, Professor Kuan warned Taiwan and Malaysia were most at risk from economic shocks emanating from China and the U.S., the world’s two biggest economies.

Both professors said the countries most affected by the slowdown needed to do more to address the economic challenges.

Professor Woo said China needed to develop a more sustainable economic model by reforming its financial markets, privatising land in rural areas and revising its ‘hukou’ system of residential registration to make it easier for people to move to cities such as Beijing. The country also needed to do more to promote the growth of rural industries, he said.

Malaysia, he noted, had seen its ‘normal’ rate of growth reduced from 8.5% prior to the Asian Financial Crisis of 1997 to 5% in the years since because foreign investment had tended to migrate to China after it joined the World Trade Organisation in 2002.

In order to boost its economy, Professor Woo said Malaysia needed to rein in a state sector that was buying up successful private companies and crowding out private investment. A revised compact between federal and state governments, some of which are governed by Putrajaya’s political rivals, was also necessary, he said.

More trade between the ten member states of the Association of Southeast Asian nations – currently about a quarter of all trade – as well as improved infrastructure, would help the region counter the China slowdown, Professor Kuan concluded.