By Anoop Singh

(Version in 中文,  日本語 and 한국어)

I am in China this week to present our new Asia-Pacific Regional Economic Outlook in Shanghai. I remain as impressed as ever by China’s energy and vibrant growth, an impression that is reinforced every time I return to this country.

China is of course an important part of Asia. And Asia is now a key driver of the global recovery. Indeed, as the world climbs out of its deepest recession in over half a century, it is Asia that is leading the recovery. While growth in the advanced world is being held back for now by unemployment and weak household and bank balance sheets, in the emerging world – and particularly Asia – it is rebounding strongly.

In our latest Regional Economic Outlook, we envisage that Asia will grow by 7 percent in 2010 and 2011, and emerging Asia by 8.7 percent each year, making significant contributions to global growth of 4.2 percent and 4.3 percent, respectively, this year and next.

We expect Asia to continue leading the way in the near term, buoyed by strong recoveries in China, India, and other countries. Global inventory restocking, particularly in the United States, should continue to fuel Asian production and exports late into 2010. And domestic demand in Asia has also developed a strong momentum, with consumption boosted by high asset values and consumer confidence and investment helped by rising capacity utilization.

Positive spillovers

In China, growth is already at 11.9 percent in the first quarter and we expect it to average 10 percent for 2010 as a whole. The strong recovery has reflected a combination of strong private demand and government efforts to catalyze consumption and ramp up infrastructure investment. China’s strong recovery is having positive spillovers for the rest of the region, especially commodity and capital goods exporters.

As China’s recovery begins to take a firm hold, the government has – rightly in my view – started to cool down the rapid pace of credit growth in order to safeguard credit quality.

Looking beyond China to Asia as a whole, there are several striking features of the region’s performance at this time.

For the first time in recent history, Asia is leading a global recovery, in the sense that the contribution to global growth of Asia outstrips that of other individual regions. It has done so before on a trend basis, but it is now doing so during a recovery from a global recession. In another break with past patterns, Asia’s bounceback is not driven only by exports. Exports are playing a role, of course, but so now is domestic demand. I don’t mean just the public stimulus, but also private demand.

And, finally, capital inflows are surging. In previous episodes, capital inflows were very slow to return to Asia, but this time around they are surging, driven by high levels of liquidity in the advanced countries but also attracted by the bright growth prospects and resilient policy frameworks in Asia.

Risk of inflation

At the same time, Asia still faces several risks and policy challenges, in both the near and the medium term. If capital inflows continue on a large scale they will raise the risks of inflation, asset prices booms and busts, and macroeconomic volatility.

And, in the medium term, a common challenge for many Asian countries is still to rebalance the economy away from a heavy reliance on exports by strengthening private demand.

Private demand will have to be nurtured through a package of policies, including measures that several countries are already taking to strengthen and develop financial sectors and social insurance systems, that will lessen the motivation for precautionary saving. A stronger exchange rate should also be part of this package and would raise household incomes and consumption over the medium term.

I will write about these and other challenges in the coming days and weeks.