US recession may not take big toll on China

(Agencies)
Updated: 2008-01-09 13:58

WASHINGTON - A US recession will dampen China's surging exports but the impact on the world's most populous nation, which is taking steps to cool down a red-hot economy, may be limited, experts say.

But they also cautioned that Beijing must be prepared to face protectionist trade policies from Washington as a result of a recession, with the sub-prime mortgage crisis and the credit rout showing little sign of easing.

Many experts believe there is a greater than a 50 percent likelihood of the United States, a huge absorber of Chinese exports, plunging into at least a short, shallow recession over the next 18 months or so.

Fred Hu, managing director of Goldman Sachs (Asia), said a modest US downturn could not take a heavy toll on China, which was stepping up efforts to cool inflation to prevent the world's fastest growing major economy from overheating.

"If the US economy really does enter into recession, there could be an impact on China in a direct way, but the timing however is not all that bad," he said on the sidelines of a Washington conference on China's economic growth and its implications for the world.

"If there is a mild recession, not a protracted, deep recession, that may provide some welcome cooling agent to the Chinese economy, whose rapid growth is largely export-driven," he said.

Daniel Rosen, a China expert at the Washington-based Peterson Institute for International Economics, said a US recession could take a toll on industries in China most dependent on US exports, especially those producing goods for the American household sector.

But he hastened to add that China's ongoing moves to boost domestic consumption in a bid to be less reliant on exports could be a critical cushion.

"At the same time though, as China shifts more to domestic consumption itself, then it relies less on US consumers and more on the Chinese consumer. So I don't expect there to be a heavy hit on China from a moderate recession," he said.

The World Bank said Tuesday that US economic growth likely slowed to 2.2 percent in 2007. The bank forecast a 1.9 percent expansion in 2008, then a rise to 2.3 percent in 2009.

"External demand for the products of developing countries could weaken much more sharply and commodity prices could decline if the faltering US housing market or further financial turmoil were to push the United States into a recession," a bank report warned.

US economic data through the third quarter of 2007 remained robust, but more recent reports suggest softer conditions.

With the housing sector slowing sharply, oil prices hovering near 100 dollars a barrel and the US dollar slumping, Beijing appears to be bracing also for financial market turbulence.

"China's financial system is thus gradually improving its knowledge to deal with instability or turbulence of varying degrees," said Chinese central bank governor Zhou Xiaochuan in a report circulated at the conference.

"While it's difficult to avoid mistakes completely, the key is to learn the right lessons, make improvements, and achieve substantial progress," he said.

As campaigning for the November US presidential elections heats up amid the weakening economy, Wing Thye Woo, a China expert with Washington-based Brookings Institution, warned about the prospect of protectionism that could take a heavier toll on the Chinese economy.

"With recession, China's direct exports to the US will fall but the protectionism will lead to further decrease in exports and I think then the outcome in China will be slowdown in economic growth," he said.

But he still believed the Chinese could offset any deflationary effects by increasing domestic infrastructure investments to help lay the groundwork for greater economic expansion in the future.