The US economy was expected to decline in the year 2008. The world's largest banks and financial advisory firms, such as CitiBank, Bank of America Corp, and Merrill Lynch & Co., have announced as much as $35 billion in debt writedowns and loan losses in the fourth quarter of 2007. The US stock market has been afflicted by a so-called "Black Monday:" the most agonizing time since 1987. Meanwhile, the financial markets have been plagued with liquidity shortages and credit tightening amid fallout from the sub prime mortgage crisis.
The United States will be bogged down in an economic recession this for the first time since 2001; and China is not entirely immune to the US's major downturn in economy.
First of all, China's exports will be hit badly if US consumption weakens, since the two are so closely linked. Second, the financial markets shock in the US will put China's capital on a rollercoaster ride, against the backdrop of financial globalization. In effect, the direction of the most robust financial market in the world will directly impact China's capital markets through capital liquidity.
Ultimately, how much China's economy could be infected by the US economic slow down will depend on the recession question. It is too early to announce a recession in the faltering US economy.
Economic recession is defined as follows: If an economy suffers a period of as long as two consecutive quarters of below-potential GDP growth, there will be greater odds for economic recession.
The US Federal Reserve's decision to cut interest rates and the Government's economic stimulus package – although appropriate for the time being – will not prevent housing prices from falling. It is also unclear if lower interest rates will spur more lending given the credit market meltdown.
Moreover, credit tightening still poses a thorny problem for the US economy. Even though the interest rates of Federal Funds have taken a nosedive, interest rates of inter-bank short-term loans– one of the major short-term financing sources of commercial banks – have been ballooning for three consecutive months. Therefore, lowering interest rates is insufficient to ease credit tightening.
If the US government forges, with Treasury Secretary Henry Paulson, a three-year mortgage rate freeze which aims to prevent introductory 'teaser' rates on sub prime mortgages from resetting to higher rates, the US economy will slip into a vulnerable state.
If this happens, nevertheless, it will not deliver a substantial blow to China's economy. A realistic menace to China's exports and capital market would come from a self-fulfilling economic recession.
An US economic recession, if it materializes, would result in a plummet in overall consumption; as well as a corresponding drop in the demand for imported commodities, dramatically hindering China's exports. Trade protectionism, a by-product of economic recession, would arise. Products labeled "made in China" would face more anti-dumping and anti-subsidizing complaints. Consequently, the competitive edge of China's exported goods would weaken.
As China faces these challenges, the government has adjusted foreign trade policies to include a cut in export tax rebates.
Additionally, if the exports industry saw a downturn in profit, China's GDP growth rate and employment rate would bear the brunt of an attack.
A serious slowdown, not a recession, was already predicted for the US economy. The developing financial shock and a self-evident prophecy for recession could tip the US economy into a real recession.
Emerging economies, China's included, seen by some as substitute economic supports for the world, and unlikely to be immune from the US slowdown due to ties with the US economy, need to heed the risk of being dragged down along with the largest economy in the world.
By People's Daily Online
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