US Slump could drag down Chinese Exports

Nov 17, 2007

US slump could drag down Chinese exports
World economic slowdown poses biggest threat to China economy

THREAT: The Commerce Ministry is pessimistic about the chances of avoiding a US and global slowdown, which may hit China's export-dependent industries hard.

BEIJING - CHINA'S Commerce Ministry has warned that a slowing United States economy will trigger a drop in Chinese exports that can be a 'turning point' for China's rapid economic growth.

A global economic slowdown stemming from problems in the US sub-prime mortgage market and the resulting credit squeeze 'will be the biggest challenge to China's economy next year', the Commerce Ministry said in a report published yesterday.

The report is China's first public comment on what repercussions it expects from the global credit crisis and a sign that the government does not support the view that Asian growth has 'decoupled' from the US, according to the Financial Times.

'The slowdown in US growth, the risk of credit tightening, the escalating turbulence in the emerging financial markets and the increasing uncertainty in the global economy will drag down China's exports,' the report said.

'If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders,' it added.

Mr Huang Yiping, chief Asia economist for Citigroup, told the Financial Times: 'I agree with the government that a marked slowdown in the US would be very bad for China. We haven't seen overcapacity or a so-called hard landing in China because it has been able to export all its excess capacity - until now.'

The ministry's report was pessimistic about the chances of avoiding a US and global slowdown, pointing out that although central banks in the US, Europe and Japan had taken numerous steps to alleviate the credit crisis, the situation had continued to deteriorate and 'panic in the credit market remains', the report said.

The US receives a fifth of all Chinese exports, making it the second-largest destination for Chinese-made goods after the European Union.

China's central bank estimates that every 1 per cent drop in US economic growth translates into a 6 per cent fall in Chinese exports.

The growth of China's exports to the US has slowed in the first three quarters of this year, the Commerce Ministry noted.

In July to September, exports to the US grew 12.4 per cent from a year earlier, down from 15.6 per cent in the second quarter and 20.4 per cent in the first three months.

The World Bank said in a report on Thursday that a slowdown in Chinese exports might not be such a bad thing, as it would help trim the country's gaping trade surplus and moderate growth, which hit an annual 11.5 per cent in the third quarter.

The Commerce Ministry also said the widening interest rate spread between China and the US would offset part of China's efforts to curb domestic inflation and asset bubbles, increasing the difficulty for its policymakers in steering the economy.

Meanwhile, global capital could take China as a safe haven, creating new challenges for financial regulators, it said.

REUTERS