Keeping an Eye on the U.S. Economy

2007-10-10

I've read several articles recently about what will happen to China if the U.S. experiences a recession. China Herald looked at two common viewpoints recently.

There is a lot of contradictory stuff floating around out there, so I can't say that I have a strong opinion on the subject. Some food for thought:

1. The U.S. is obviously a big source for Chinese products. Slow GDP growth or even a recession would hit imports. Can't deny that.

2. One of China's chief concerns right now is inflation, which is being fuelled by capital inflows. A decrease in U.S. demand for Chinese products would be beneficial in this regard.

3. China is one link in many enterprises' supply chains. Value added in China is often a lot smaller than one might think. A decrease in demand for Chinese exports would ripple down the supply chain and hurt a lot of other countries as well, including many in Southeast Asia – but this would also spread out that economic pain to some degree.

4. China is starting to source more intermediate goods locally, which may make it more vulnerable to changes to global demand for its exports. More fun on this topic can be had by reading this IMF Working Paper. The WB quarterly numbers also point to the increasing move towards import substitution (see link below) – I really don't know why that is happening and wish someone would clue me in, particularly on whether there is some (government) design here or if this is happening for other reasons.

Nouriel Rubini, in a nice speech about the global effects of a U.S. "hard landing," said that China is vulnerable given the makeup of its U.S. exports, since a U.S. recession will most likely be driven by weak consumer demand. Read the speech here.

The World Bank recently came out with its quarterly update for China (haven't read the whole thing yet), and the emphasis there is on curbing inflation and mopping up excess liquidity, not on any looming crisis from a U.S. downturn or from volatility in financial markets. Download the WB report here. For a great little paper, slightly scary, on the dangers of inflation, check out Albert Keidel's "China's Looming Crisis — Inflation Returns."

Just to be clear – I am avoiding making a call here and merely pointing out some sources. Call me weak, call me a fence sitter, call me useless, but I know when to avoid making stupid and ill-informed predictions.