ECONOMICS SCENE: CAN THE .U.S MANAGE CHINA'S ECONOMICS COMEBACK?

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The New Economy

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ECONOMIC SCENE: Can the US manage China's economic comeback?

The giant's revival will help cushion the blow of falling global output. But the Obama administration will need to take care in its dealings.
By David R. Francis | Staff Writer/ June 5, 2009 edition

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China's back.

After a pause at the end of 2008, China's economy rebounded in the first quarter of this year to an annual real growth rate of 6.1 percent in its output of goods and services. That's about half China's astonishing annual growth rate in gross domestic product (GDP) a few years back.

Nonetheless, it's welcome news for the rest of the world.

While global output is expected to fall 1.3 percent overall this year, according to the International Monetary Fund (IMF), China's economic revival will help cushion the blow. Its industries will boost their purchases of expensive machinery and other capital goods from the United States and Europe – and buy more oil and raw materials from other nations.

Though the average income of an individual Chinese is only about $3,000, China, with its 1.3 billion people, has the world's third-largest economy after the US and Japan. China has about 10 percent of world GDP, compared with 25 percent for the US. So China's recovery will have less impact globally than one in the US.

Nevertheless, China represents "the gold standard" in terms of responding to today's "Great Recession," says Nicholas Lardy, an economist with the Peterson Institute for International Economics in Washington. China's stimulus package, announced last year, was bigger relative to the size of its economy than that of any other country, including the US.

The IMF predicts China's economy will grow 6.5 percent this year, 7.5 percent in 2010. That may help to whittle down China's trade surplus with the US, but barring a surprise, the deficit will remain large.

That's a cause for complaint from the AFL-CIO, the nation's top labor organization. It regards China's surplus as a drag on US manufacturing. Last year, China exported goods worth five times more than it imported from the US, says Thea Lee, the federation's policy director in Washington. The trade deficit with China amounted to $256 billion. To Ms. Lee and some other economists, the deficit is a result of unfair trade practices by China, including keeping its currency undervalued and subsidizing exports.

By supporting congressional action, the AFL-CIO will be trying to pressure the Obama administration to be tougher in its economic dealings with China. Representatives Tim Ryan (D) of Ohio and Tim Murphy (R) of Pennsylvania have a bill demanding that the administration tackle any currency manipulation by taking strong remedial measures through the World Trade Organization.

NOTE: last year , the china's exported goods worth fives times more than it important from the u.s , says thea lee , the federation's policy director in washington.

So far the administration has acted cautiously in its dealings with China, which has piled up perhaps $1.5 trillion in US government securities. It did not formally declare that China manipulates its currency in a mid-April review of exchange-rate policies, for instance. The value of the yuan has risen 20 percent since mid-2005. Probably 15 percent more is needed, says Mr. Lardy.

With the US unemployment rate headed upward, Congress might pass "China bashing" trade legislation this year or in early 2010, Stephen Roach, chairman of investment bank Morgan Stanley Asia, warned in a recent analysis. He figures it's a 25 to 33 percent probability.

If Congress does act, he figures Beijing would retaliate. It "would instruct its foreign-exchange-currency managers to boycott the next US Treasury auction" of federal debt instruments, he writes. This would trigger "a full-blown crisis in the dollar and a related spike in real long-term US interest rates that would exact a severe toll on a bruised and battered US economy" and the rest of the world.

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