KEY POINTS:
Of all the questions facing Asia in 2007, none looms larger than what to expect from China.
The last 12 months proved how much Asia is relying on its second-biggest economy. Japan may be back and the US economy is by far the world's largest, yet China's 10 per cent growth is increasingly underpinning Asia's hopes.
China isn't likely to slide into crisis in 2007, though the number of issues that may come to a head is daunting. On the one hand, China needs to create millions of jobs to spread the benefits of rapid growth. On the other, it must slow things down to avoid overheating - something it didn't do in 2006.
China's economy lacks a liquid bond market, limiting the central bank's influence. It also lacks a cohesive, national fiscal policy centred in Beijing.
Throw in worsening pollution and rising rural discontent. It's not escaping rural Chinese that folks in Shanghai, Beijing and Shenzhen seem to be getting wealthy while others struggle to find clean drinking water.
The year ahead will see China under intense pressure to boost its currency, even though it's unlikely to do so significantly. It also will be pushed to open its financial sector and clamp down abuses of intellectual-property rights.
China also needs to come to terms with how it can compete in the information age while limiting the flow of information. It must loosen up to encourage innovation and create more domestic growth.
There are other themes worth keeping an eye on. Here are five:
* A US slowdown. Monetary policy, as the late Milton Friedman liked to say, operates with a lag. So far in 2006, the Federal Reserve has added 100 basis points to the overnight lending rate to 5.25 per cent, and those increases are still filtering through the economy. In case of a US slowdown export-dependent Asia will be hurt.
* Inflation. Asian central banks may need to take stimulus out of their financial systems. Complicating things for Asia are continued strong global growth and the risk that oil prices will climb.
* Japan's tepid return. In 2006, investors realised that Japan's long-awaited recovery wouldn't be as powerful as hoped. And Prime Minister Shinzo Abe, in office since September, remains vague about his plans for the economy.
* The environment. From China's polluted rivers to Hong Kong's smog to Indonesia's forest fires, there's a sense that many parts of Asia are reaching their environmental limits.
* Geopolitics. In recent years, the biggest surprises came from politics. North Korea remains a huge wildcard, as do China's relations with Taiwan, which officials in Beijing see as a runaway province. In Thailand, the people are still sorting out where the military leaders are taking their country. South Korea is entering a presidential election year. Malaysia's Prime Minister, Abdullah Ahmad Badawi, is increasingly being second-guessed by Opposition forces.
So stay tuned for an interesting year in Asia.
- BLOOMBERG
