After slashing its forecast for the region in March, the ADB reversed course in its updated Asian Development Outlook (ADO) 2009. The bank said developing economies in Asia would grow by 3.9% this year, up from its previous forecast of 3.4%.

“Despite worsening conditions in the global economic environment, developing Asia is poised to lead the recovery from the worldwide slowdown,” said ADB Chief Economist Jong-Wha Lee.

However, the growth will not be evenly distributed. Economic growth in East Asia will be driven largely by China’s dynamic economy. But economic growth in Southeast Asia will be sluggish, because the recoveries of Vietnam and Indonesia will not be enough to offset weakness in Malaysia, Thailand and Cambodia.

ADB boosted its outlook for annual economic growth in China to 8.2% from 7% earlier this year, and the bank believes China’s economic expansion will accelerate to 8.9% next year. That will help push economic growth in East Asia to an annual rate of 4.4%, compared to 0.1% growth in Southeast Asia.

ADB had underestimated China’s resilience in March when it predicted just 3.6% growth for East Asia.

“In the People’s Republic of China, aggressive monetary easing and the massive fiscal stimulus package rolled out by the government bolstered the region’s largest economy, which is now expected to grow by 8.2% in 2009 and 8.9% in 2010, up from the March forecast of 7% and 8% respectively,” said ADB.

Indeed, the potency of China’s $587 billion (4 trillion yuan) stimulus plan caught many analysts off guard.  Two of the world’s key global institutions – the World Bank and the Organization for Economic Cooperation and Development (OECD) – and a large swath of investment banks were forced to raise their 2009 and 2010 growth estimates for China’s economy after the country announced second-quarter gross domestic product (GDP) growth of 7.9%.

The OECD said it now expects China’s economy to grow by 7.7% this year and the World Bank boosted its projection to 7.2% growth.  GDP will expand by 9.3% in 2010, according to OECD estimates.

BNP Paribas SA (OTC: BNPQY), Barclays Capital, Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE: UBS), Morgan Stanley (MS), Standard Chartered Bank, and RBC Capital Markets all raised their forecasts for China’s economy as well.

China’s stimulus package gave the economy a big kick in the first half of the year, spurring bank lending and driving fixed asset investment. It even stimulated the oft-maligned Chinese consumer, boosting domestic demand while the market for exports remained dormant.

Chinese banks lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year, nearly double the total loans extended throughout all of 2008.

Fixed-asset investment rose 33.5% in the first half year to $1.34 trillion (9.132 trillion yuan), according to the National Bureau of Statistics (NBS). Investment in infrastructure rose 57.4% year-over-year, with spending on railways up 126.5% and highway spending up 54.7%. Property sales were up 53% in the first six months from a year earlier.

Of course, fixed-asset investment has been consistently strong in China for the past decade. The real turnaround in the past six months has been that the frugal Chinese consumer has begun to spend more liberally.

China’s retail sales in the first half of the year rose 15% to $859.6 billion (5.87 trillion yuan).

Still, the ADB did warn Asian countries that their strong recovery is still uncertain and said they should continue to carry out stimulus measures until Western countries catch up.

“The improved regional outlook should not make developing Asian economies complacent,” said Lee. “A protracted global slowdown or the hasty withdrawal of stimulus packages can degrade the region’s ongoing recovery.”

Source: Asian Economies to ‘Lead the Recovery,’ Says ADB

After spending three days visiting the restive eastern province of Zhejiang, Premier Wen Jiabao argued for maintaining the loose economic policies implemented under the stimulus program, saying it’s too soon to be “blindly optimistic,” according to a statement by the State Council.

His remarks are likely to fuel an ongoing debate between government officials over whether it’s time to rein in bank lending.

After the government called on Chinese banks to provide increased liquidity to the economy, they lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year – almost 50% over the government’s target of $732 billion (5 trillion yuan), and nearly double the total loans extended throughout all of 2008.

Most analysts credit the stimulus program for China’s economic rebound, as GDP expanded by 7.9% in the second quarter, up from 6.1% in the first quarter. But now some officials have voiced concerns that asset bubbles and non-performing loans could threaten a long-term economic recovery.

Last week, Chinese Legislator Yin Zhongqing called for limiting new loans to 10 trillion yuan for the full year, according to the Wall Street Journal.

The benchmark Shanghai Composite Index (SSE) is down 15% this month, amid fears that the government will move to tighten bank lending in the second half of the year to throw a wet blanket on the economy. The SSE, Chinas’ benchmark index, zoomed 91% from Jan. 1 to Aug. 4, hitting a high of 3,478.01.

China’s cabinet yesterday (Wednesday) said it’s watching for signs of overcapacity in industries including steel and cement and will increase “guidance” in the coal, glass and power sectors.  It will also place new restrictions on stocks and bonds sold by companies in those industries.

And continuing another trend, the People’s Bank of China last week in an internal memorandum notified its branches to curtail lending for the remainder of the year.  Other Chinese banks, including the Industrial & Commercial Bank of China (ICBC) and China Construction Bank (CBC), have also curbed lending in recent months, Reuters reported, citing anonymous sources.

The Chinese bi-monthly Caijing reported that with the new ceilings in place, ICBC has already lent 83% of its full-year new lending total, while CCB has lent 79%.

Other bankers reported that liquidity appears to be drying up and that loan approvals are taking longer than normal.

“It takes more time to process credit approval from Beijing headquarters now, and the pricing for onshore deals has been heading north in recent months, particularly for U.S. dollar deals,”a banker familiar with the process told Reuters.

And while the going rate for loans to top-tier multinational companies in the first half of the year were made at a margin of 150 basis points above the London Interbank Offered Rate (LIBOR), margins have now soared to over 200 basis points, according to the same banker.

Still, Beijing is unlikely to pull back from the massive stimulus program and the resulting liquidity that has bolstered the world’s third-biggest economy.  Even with the slowdown, analysts still expect total lending to exceed $1.5 trillion ($10 trillion yuan) this year.

And Premier Wen has called on policymakers to maintain “moderately loose” monetary policy and “active” fiscal policy.

That means the Chinese economy will remain flush with liquidity for the foreseeable future. And just to be on the safe side, the China’s State Council has issued a directive to banks to provide more loans to smaller firms.

“We will give appropriate subsidies to financial institutions to support them in extending loans to small companies,” the council said following a regular weekly meeting.

It also will extend measures to reduce the social security contributions paid by smaller firms that are facing difficulties and will increase tax support and direct government funding for them.

“This is tightening but it’s not a total shutdown,” Ken Peng, an economist with Citigroup Inc. (NYSE: C) in Beijing told Bloomberg News. “Policy hasn’t reversed but they are contemplating moves that have a lesser impact on the broader economy.”

Source: China Curbs Bank Lending but Vows to Keep Liquidity High