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Slowing U.S. economy may drag down China's GDP by 1%
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08:06, April 14, 2008

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· Boao Forum for Asia 2008
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If the U.S. economic slowdown sustains for one year, it could drag down China's gross domestic product (GDP) by 1 percent, said a Chinese economist in Boao Sunday.

Fan Gang, a Monetary Policy Committee member of the People's Bank of China, the central bank, said the U.S. subprime mortgage crisis affected the Chinese economy mainly through trade and investment.

Fan made the remarks at the 2008 annual conference of the Boao Forum for Asia, which concluded in China's southern Hainan Province Sunday.

Historical figures revealed a 1 percentage point slide in the U.S. economy would lead to 5 to 6 percentage points decline in China's exports to the United States, Fan said.

China's slower exports, however, were largely due to the government's export policy shift, not the credit crunch, Fan said.

Weak dollar and continuous U.S interest rate cuts had raised people's expectation of a stronger yuan, and triggered a hefty inflow of overseas funds to China.

The subprime mortgage product itself was not to blame, he noted, pointing to the poor risk management as the culprit.

He noted people should also look at the bright side of the coin as imports from the affected economies will eventually rebound as long as they enjoy steady growth.

Of the total 180 billion U.S. dollars increase of China's foreign reserve in the first two months, a hefty 150 billion came from the overseas funds inflow, he said.

The massive funds could push up domestic prices, while on the other hand contribute to the economy as well. As a matter of fact, emerging markets will continue to vie for foreign investment for along period of time, he said.

He stressed that the prevention of a financial crisis should top Chinese government's macro-economic policy, saying a drastic Renminbi appreciation could give rise to a crisis, and preemptive self-regulation is the best way to avert it.

Chinese exporters can not afford a one-off appreciation that could trigger drastic order losses, and the moderate pace could offer them a cushion from the negative impacts, he said.

Euro appreciates faster than Yuan did, resulting in yuan's depreciation against other currencies including Euro and the Japanese Yen, Fan said.

That could cause more imbalances with other trading partners of China like EU and Japan. Therefore, it is up to the dollar to decide the balanced pace for the Yuan's appreciation, he said.

People's Bank of China governor Zhou Xiaochuan said during the International Monetary Fund meeting in Washington that the exchange-rate has limited impact on adjusting the trade imbalance, and over-exaggeration of its function is not only impractical but will misguide the course of such an adjustment.

He told a news conference on Saturday that the negative impact on the Chinese economy, brought by the subprime crisis, is lighter than expected, and the losses of China's financial institutions are within their tolerance, which will not affect their profitability and share prices.

Liu Mingkang, head of the China Banking Regulatory Commission, said Saturday at the Boao Forum for Asia that China should draw a lesson from the credit crunch and strengthen risk control and supervision in its financial reforms.

"The crisis reminded us that China's financial industry must open step by step to the outside world. Otherwise, we will be incapable of coping with the accompanying risks and problems," he said. "Supervision and monitoring is very important."

Established in 2001, the Boao Forum has become a major platform for discussion and debate on economic development in Asia. The theme of this year's annual conference of the forum is "Green Asia: moving towards win-win through changes".


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