China’s Problems May Hurt Us, Too

02/12/2009 1:00 pm EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says that slowing growth in China may harm the US economy as well.

Adding to economic woes in the US: Hard times in China. Growth is slowing to 6.5% this year, enviable by US standards but far below last year’s dazzling 9% growth.  

US exporters are already being slammed, especially firms that sell semiconductors and the equipment needed to manufacture them, plus plastics, machinery, construction equipment, information technology products, steel, iron, chemicals, and aluminum.  

The impact on US trade will be massive. China is America’s third largest foreign market, taking 6% of US exports, some $68 billion worth. Add to this decline a drop in sales by US affiliates in China, and the toll on US firms is even greater.  

China’s other trade partners are suffering, so they can’t buy as many US goods, either.  

Among those affected: Japan, South Korea, Taiwan, Singapore, Brazil, and Australia. In total, they absorb approximately 16% of goods exported from the US

China will also slow its purchases of US bonds, pushing up interest rates. As the US buys less from the Asian leader, it will have fewer dollars to invest here.

But don’t fear a mass withdrawal of China’s capital. It’s out of the question. China is by far the US’s biggest foreign creditor, with assets over $1.3 trillion. If it were to try to sell too much, too quickly, the dollar would just collapse, making Chinese holdings in dollar-backed securities worthless. It would be suicide.

Though China’s growth rate will soften, its economy won’t shrivel. There’s no chance of the Asian giant falling into the kind of recession the US is in.

China has plenty of tools to fight its slowdown, including fiscal stimulus. Chinese debt at the government, corporate, and household levels is minimal, so there’s plenty of room for China to spend more without driving up interest rates.

Beijing is ramping up investment not only in infrastructure projects to provide jobs, but also in health care, education, pensions, and transfer payments to households. Plus it’s forcing banks to lend more. Beijing owns the financial institutions, so, unlike Washington, it needn’t rely on persuasion or incentives to get its way.

And China is subsidizing consumer goods...cell phones, freezers, cars, etc. It also has lifted many of the recent barriers to real estate acquisitions. Imposed to deflate China’s property bubble, the restrictions wound up bursting it.

Will all that help? Yes, enough to shorten its downturn, though not enough to prevent it. Expect 8%-9% growth to be the new norm when recovery finally comes. That’ll help the US, but not nearly as much as those years of double-digit growth [in the recent past].

Subscribe to The Kiplinger Letter here…

Related Articles on MARKETS