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US Economy Affects China Much
The future of the US economy remains unclear. It is expected to maintain its growth momentum but must solve some challenging problems to keep away a protracted economic recession, said an article in China Economic Times.
If there was a "hard landing" to the economic slowdown now occurring in the United States, China's economy would feel the impact, the article added.
The technology-driven and information-based new economy, which brings low costs and high efficiency, will go on to play a dynamic role in sustaining the US' economic growth over the next decade. Its potential has yet to be fully realized.
Ample human resources will also prop up the US economy, the article said.
The talent-attracting immigration policies of the United States will continually bring talented people from abroad and inject fresh blood into the economy. To woo more technology personnel, it revised immigration laws recently and eased its limits on the annual number of immigrants, lifting the figure from 60,000 to 100,000.
People born in the baby-boom period of the 1950s and early 1960s now account for a quarter of the whole population and have grown into an active consumer group. They earn high incomes and have strong consumer appetites, which may help extend the economic expansion to 2010, the article said.
The abundant capital in the United States will be favourable to the country's economic prosperity, the article said.
The United States is the most appealing place in the world for capital inflow.
It has a relatively sound legal regime to protect the interests of investors and intellectual property rights, ensuring the healthy and rapid growth of new industries.
Despite these favourable factors, the US economy faces challenges, the article warned.
The huge trade deficit, because of weak exports and strong imports in recent years, has hit its traditional industries hard.
In 1999, its trade deficit reached US$347 billion.
If the deficit worsens, it may jeopardize the confidence of international investors towards the US dollar and incur a dollar depreciation.
The ever-decreasing rate of individual deposits makes the US economy depend too much on capital inflow. That dependency may devastate the economy if people lose confidence in the US dollar.
And whether the successor to Federal Reserve Chairman Alan Greenspan can maintain his policies and effectiveness also adds to the uncertainty of the economy, the article said.
The possibility of an abrupt economic recession in the United States is slim. But if it does happen, China's economy would be greatly influenced, the article said.
Trade between China and the United States has increased rapidly in recent years. The average annual growth rate from 1996-99 was 12.8 per cent and in 1999 China exported US$42 billion of goods to the United States, accounting for 21 per cent of its total exports.
A sudden downshift in the US economy will not only drive down direct trade volume between the two countries but also affect China's exports to the United States via the Hong Kong SAR, the article said.
And, since the United States is a major market for exports from Asia, especially Japan and Southeast Asian countries, their economies will also be affected greatly if the US economy slows down.
China's exports to Asian economies account for 53 per cent of its total exports, which means a deterioration in the economies of Asian countries will put China's export business in trouble.
Still, Chinese exports could remain strong - even in a US recession. Most products exported from China are low in price, which may make them more popular after a slowing US economy forces consumers to pinch pennies.
The depreciation of the US dollar would lead to the devaluing of China's renminbi yuan, boosting China's exports.
US investment in China has increased rapidly since the early 1990s. The average annual increase rate was 54 per cent during the 1990-99 period.If the US economy is hit by a slump, investment in China would decrease.
But considering that a large amount of capital will flow out of the United States if a hard landing occurs, China may receive more investment, the article said.
From 1990-99, global foreign direct investment was US$865.5 billion, one-third of which was in the United States. A static US economy will result in capital redistribution in other parts of the world.
Forecasts by the European Union show that the average GDP growth rate of EU members could be 3.4 per cent this year.
It will benefit most from the capital re-allocation, the article said.
The stagnant Japanese economy will not receive much of the redistributed funds. But as a whole, Asia is an important destination, and China will thus benefit.
To alleviate the impact of a possible US economic downshift, China should continue to adopt tax policies which favour industries to boost exports, the article suggested.
It must strive to make its administration more transparent and efficient if it is to land foreign investment.
To this end, it should also improve its legal system, especially the foreign-related legal framework, the article concluded.
Source: China Daily
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