China May Be Cooling Off At The Wrong Time

Source : The Business Times, January 15, 2008

Global economy will take double hit if US goes into recession

(PARIS/BEIJING) China is starting to gain control of its turbocharged economy, just as a US slowdown raises the risks of doing so.

A narrowing trade surplus and declining money- supply growth are among the first signs that China 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 the currency appreciate to dampen growth and inflation.

The risk is that, with months of effort to cool off China finally taking hold when the US is already flirting with 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,' said Frank Gong, Hong Kong-based chief China economist at JPMorgan Chase. 'If the central bank raised interest rates too much, it would damp domestic demand and increase the danger of 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, the ruling Politburo and the central bank are trying to engineer a cooling of growth that doesn't also throw millions of China's 1.3 billion people out of work.

The tougher policies may be starting to pay off, data showed on Jan 11. Last month's trade surplus shrank to US$22.7 billion from US$26.2 billion in November, and the broadest measure of money supply rose by the least in seven months.

Vice-Finance Minister Li Yong said on Sunday that China plans to better coordinate fiscal and monetary policies in 2008 to further cut the trade surplus and mop up excessive liquidity. Yi Gang, a vice-governor of the People's Bank of China, said the central bank 'will decisively fight against inflation and implement tight monetary policies'.

Meanwhile, Goldman Sachs last week joined Morgan Stanley and Merrill Lynch in forecasting that the US will slip into recession this year. Yesterday, Goldman cut its 2008 growth forecast for China to 10 from 10.3 per cent.

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, said Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong. 'A US recession would cause a major disruption to the Chinese economy,' he said. -- Bloomberg