Five Megatrends for Asia in 2007

After a year of expansion across the continent, here are five trends to keep an eye on, from high-speed growth in China to inflation in India

by Brian Bremner

No doubt about it, Asia's economic dynamism was on full display in 2006. China and India dazzled the world with high-speed growth rates. The mainland's biggest bank, Industrial & Commercial Bank of China, raised a record-busting $22 billion in the world's largest-ever initial public offering.

Japan, meanwhile, marked the anniversary of its longest postwar economic expansion. And the region saw some frenetic deal making thanks to the growing ranks of cash-rich companies from Mumbai to Singapore and the wave of global private equity funding now streaming into Asia.

Heading into 2007, the broad outlook is quite good, but the region isn't without its challenges and there will surely be surprise developments. While crystal-ball gazing is always a dangerous sport, here are five trends already in motion that seem likely to shape the major business stories in Asia next year.

China: Reining in Social Unrest

If there is a scenario that keeps upper-echelon Communist Party officialdom on edge, it has to be the prospect of a massive wave of social unrest tearing the county apart. China's dazzling growth statistics—the mainland's 10%-plus economic growth, a $1 trillion stockpile of foreign currency reserves, the $1.5 trillion in global two-way trade the country rakes in—rightly get plenty of attention.

China is a fantastic growth story—but it's also a developing economy with big disparities in wealth between the educated, white-collar residents of prospering coastal cities and the farmers and migrant workers who can barely make ends meet. A December study by the China Academy for Social Sciences showed that the poorest 20% of Chinese get just 4.7% of total income, while the wealthiest 20% take home half. That kind of income inequality—previously unheard of on the mainland—is similar to the levels seen in some of Latin America's least equitable societies. That is likely to foster social envy and, when combined with widespread government corruption and world-class smog and environmental degradation, creates a combustible mix.

Beijing party cadres are definitely worried. A recent study by the Sociology Dept. of the Central Committee of the Chinese Communist Party School published Dec. 18 in the state-controlled Beijing Daily revealed that nearly 37% of government officials viewed social unrest as the key problem facing the country. The wealth gap was No. 2.

Though a bloody clash on the scale of the Tiananmen Square incident is unlikely, next year could see some nasty confrontations that probably will get reported, given the influx of foreign journalists coming to China ahead of the 2008 Beijing Olympics. Disgruntled Chinese know that any really rough police tactics have a better shot of being revealed to the rest of the world then—and some may be tempted to take advantage of that fact. Count on more publicized cases of corruption crackdowns by Beijing in the state-controlled press to help assuage public anger.

Meanwhile, the U.S. and other Chinese trading partners can pretty much forget any meaningful moves by President Hu Jintao's government to let its undervalued currency (the yuan) appreciate dramatically or otherwise cool off its labor-intensive export sector in 2007. If there is a meta-theme that will best predict Chinese behavior in the next year or so, keeping a lid on social unrest is the predominant one.

India: Wrestling Down Inflation

In 2007, Reserve Bank of India governor Yaga Venugopal Reddy will have to pull off one of the most delicate balancing acts in central banking. The Reserve Bank of India has already raised interest rates several times over the past year, and on Dec. 8 increased the proportion of deposits that India banks are required to keep in cash. Yet India's $780 billion economy shot up an unexpectedly robust 9.2% in the third quarter over the year-ago period and could be clocking 10% growth in the year ahead. Credit Suisse in Hong Kong even thinks India has a shot of outpacing China in 2007 in terms of economic growth.