China, America's economic codependent, has hiccups


BEIJING — Nearly every day brings signs that China's blazing, export-driven economy is hitting the skids, and that's mixed news to the United States.

China's slowdown has generated concerns that it may splash out less money to buy the piles of U.S. Treasury bonds that Washington must sell to finance trillion-dollar-a-year deficit spending.

Some economists say those fears may be overblown, however, and they point to other factors that could test China's resilience as millions of workers get thrown out of jobs, factories shut down, port activity slows and economic growth hits the doldrums for the first time in a generation.

In one of the most dramatic, but little-noticed, indications this week that manufacturing activity is slowing sharply, Taiwan announced that its exports to the mainland fell 54 percent, signaling a collapse in the supply pipeline of components that go into laptops, mobile phones and computer chips, which assembly plants in China pump out for the world market.

Shanghai, the once-throbbing hub at the Yangtze River Delta, saw an extraordinary double-digit decline in its industrial output last month, China Daily reported Friday, citing an economic magazine, Caijing.

"There's much more nervousness about the economy. You can't pick up the newspaper without seeing signs that the economy is slowing," said Michael Pettis, a professor of finance at Peking University's Guanghua School of Management.

China's long-roaring economy has allowed the export-driven nation to amass $1.9 trillion in foreign reserves, and about $1 trillion of that is in U.S. debt instruments. A relatively poor but quickly growing nation, China has used the savings from its trade surplus to buy U.S. Treasuries and finance American deficits, making it a conjoined twin of sorts, fueling a U.S. consumption binge in a self-reinforcing cycle that's bound the two nations in economic interdependency.

As the global slowdown reins in China's economy, however, Beijing will have a diminishing supply of hard currency to buy U.S. Treasury bonds and other instruments.

"Compared with previous years, China will buy less," said Qu Hongbin, HSBC Bank's chief economist for China, "so the U.S. will have to find another source to finance its spending."

Slower growth doesn't yet mean China has less hard currency flowing into its coffers. Indeed, it has more. Imports to China are falling faster than its exports, widening the nation's trade surplus in November to a record $40 billion, from $35.2 billion in October.

"The trade surplus is going to get bigger before it gets smaller," said Ben Simpfendorfer, a strategist for the Hong Kong branch of Royal Bank of Scotland. A decline will follow, however. Within a few months, he said, he expects the monthly trade surplus to fall to $20 billion or less.

While that would seem to leave the People's Bank of China with less capital to buy U.S. bonds, other factors come into play, Pettis said, such as possible "hot money" flows out of China by business owners seeking better returns. Some of that money may offset diminished purchases by the central bank.

"In theory, there are capital controls in China, but capital controls are hard to enforce," Pettis said. "Probably a lot of businessmen are taking their money out of the country. If they buy dollars, then it doesn't really matter if the PBOC buys dollars."

Chinese and U.S. officials have downplayed the risk that China might suspend purchases of U.S. Treasuries, saying that the two countries' economies are simply too interdependent and such action could backfire.

During a visit to Beijing, Deputy Secretary of State John Negroponte suggested that China wouldn't vary how it handles its holdings of U.S. debt instruments.

"My Chinese interlocutors pointed out that they have been very responsible in dealing with the question of the American debt that they do hold, and they want to be viewed as a reliable partner in that regard," Negroponte said at a news conference Thursday.

Unlike many countries affected by the global slowdown, China's economy is still growing, just not as fast as before. China reported blistering 11.9 percent economic growth in 2007. The annual figure for 2008 hasn't yet been released, although the third-quarter pace was 9 percent and it may stall to as low 5 percent in the fourth quarter, Citigroup said. The World Bank expects China's growth this year to be the smallest in almost two decades.

That kind of drop has experts concerned about other factors, including social stability.

Every 1 percent drop in China's growth rate translates to a loss of as many as 8 million jobs. After the Lunar New Year holiday later this month, tens of millions of migrant workers will return to factories, and some will find that they've lost their jobs.

This week's issue of Outlook magazine, a publication of the state news agency, Xinhua, carried a stark warning about possible unrest caused by jobless migrant workers and college graduates unable to find work.

"In 2009, Chinese society may face even more conflicts and clashes that will test the governing abilities of all levels of the party and government," a Xinhua reporter, Huang Huo, told the magazine in what were government-sanctioned remarks.

Such concerns have social scientists watching a variety of economic indices to gauge potential fallout, including electricity consumption. On Thursday, the official China Electricity Council said growth in power demand last year was only 5.2 percent. Usually, power demand growth exceeds overall economic growth.

The slowdown in trade with Taiwan is a key variable with broad implications.

"Nearly 60 percent of the processing enterprises producing export products on the mainland belong to Taiwan businessmen," said Wang Jianmin of the Institute of Taiwan Studies of the Chinese Academy of Social Sciences.

Some experts said that the dramatic drop of exports from Taiwan might signal difficulties not only for China but also for other countries around the world.

"The fall topped expectations. It adds to the mounting evidence that the current global deceleration is quite sharp and quite deep," Brad Setser, an international economist at the Council on Foreign Relations, a policy research center, wrote Friday in his Follow the Money blog.

(McClatchy special correspondent Hua Li contributed to this report.)


Brad Setser's Follow the Money blog


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