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China economy may cool down at worst time

Combination of a US recession and a hard landing in China could cause global slowdown

PARIS – CHINA is starting to gain control of its turbocharged economy, just as a United States slowdown raises the risks of doing so.

A narrowing trade surplus and declining money-supply growth are among the first signs that the world’s fourth-largest economy is pulling back from its fastest expansion in 13 years.

The government has raised interest rates six times in a year, restricted credit, frozen some prices and let China’s currency appreciate to dampen growth and inflation.

The risk is that, with months of efforts to cool off China finally taking hold when the US is already flirting with a recession, both main engines driving the global economy may power down at the same time.

‘As foreign demand deteriorates, China may overdo its tightening of policy and cause a sharp economic slowdown,’ says Mr Frank Gong, Hong Kong-based chief China economist at JPMorgan Chase.

‘If the central bank raises interest rates too much, it will dampen domestic demand and increase the danger of an economic downturn.’

China is still on a tear. Its economy expanded 11.5 per cent last year, according to a government estimate, and it contributed 17 per cent to global growth, the same as the US.

With prices rising at the fastest pace in 11 years, however, Beijing is trying to engineer a cooling of growth that does not also throw millions of China’s 1.3 billion people out of work.

The tougher policies may be starting to pay off.

Last month’s trade surplus shrank to US$22.7 billion (S$32.4 billion) from US$26.2 billion in November, and the broadest measure of money supply rose by the least in seven months – prompting Goldman Sachs yesterday to cut its growth forecast this year for China to 10 per cent from 10.3 per cent.

Goldman last week joined Morgan Stanley and Merrill Lynch in forecasting that the US would slip into a recession this year for the first time since 2001.

The two economies are closely linked. The US buys about 19 per cent of China’s exports. A cooling US economy could magnify the impact of China’s anti-inflation measures, says HSBC Holdings chief China economist Qu Hongbin.

‘A US recession would cause a major disruption to the Chinese economy,’ says Mr Qu. ‘Aggressive tightening could prove to be an overkill.’

A 1-percentage-point slowdown in the US would trim China’s export growth by 4 percentage points and reduce gross domestic product by 0.5 percentage point, according to Mr Ma Jun, chief China economist at Deutsche Bank in Hong Kong.

A simultaneous slowdown in the US and China would be ‘bad news’, says Dr Nariman Behravesh, chief economist at Global Insight.

China’s trade with the rest of the world has been growing three times as fast as the global average since it joined the World Trade Organisation in 2001.

‘A combination of US consumer spending and Chinese imports has pulled the world economy along,’ says Dr Behravesh. ‘The combination of a US recession and a hard landing in China could push the global economy into a recession.’

Still, if Chinese leaders want to whip inflation, they may have no option but to keep raising interest rates and constraining credit and hope that any US downturn is short-lived.

Chinese consumer prices accelerated by 6.9 per cent in November from a year earlier, while producer prices rose at the fastest in more than two years.

The dilemma, says HSBC’s Mr Qu, is that China cannot afford to wait to discover the fate of the US economy.

Policymakers need to make a bet on whether domestic inflation or falling overseas demand is the bigger risk, he says.

BLOOMBERG NEWS

GROWTH BOOSTERS

A simultaneous slowdown in the US and China would be bad news because a combination of US consumer spending and Chinese imports has pulled the world economy along, says Dr Nariman Behravesh of Global Insight.

FINE BALANCE

‘As foreign demand deteriorates, China may overdo its tightening of policy and cause a sharp economic slowdown.’

MR FRANK GONG of JPMorgan Chase, who adds that if the central bank raises interest rates too much, it will dampen domestic demand and  increase the danger of an economic downturn

Source: The Straits Times 15 Jan 08

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