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China economic slowdown sparks U.S. concerns

January 11, 2009 | Freep.com

It may have less to finance American spending, some say

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.
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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 that manufacturing activity is slowing sharply, Taiwan announced last week that its exports to the mainland fell 54%. That signals 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, the 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 will buy less'

China's long-roaring economy has allowed the export-driven nation to amass $1.9 trillion in foreign reserves. 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 U.S. deficits, making it a conjoined twin of sorts.

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

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 is to follow, however. Within a few months, he said, he expects the monthly trade surplus to fall to $20 billion or less.
Other factors in play

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."

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.

BY TIM JOHNSON, MCCLATCHY NEWSPAPERS

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