01 June 2007

Views of A China Collapse Affecting the US Economy

Economists are mixed in their view of how a collapse of the Chinese economy would affect the US.
Kenneth Rogoff, economics professor at Harvard University:
A sharp slowdown in Chinese growth represents the single biggest risk to U.S. and global growth today. China's massive excess savings have been helping to hold down mortgage interest rates everywhere. Trade with China has been a major driver in the revival of U.S. productivity that has helped boost growth and lower inflation. Above all, China's generally peaceful integration into the world economy has been helping lower market volatility, thereby driving up the price for risky assets such as housing and equities. Most investors are far too sanguine about the risk of a China meltdown, forgetting that China is still very much a poor developing country with huge political, social, and financial vulnerabilities.. The immediate impact on the United States would be through a sharp rise in interest rates and market volatility, and a concomitant drop in equity and housing prices.

....Clyde Prestowitz, president of the Economic Strategy Institute:
The U.S. is not that vulnerable to a slowdown in China. We don't export a lot there, and the main problem for us would be any slowdown in Chinese capital flowing into [U.S. Treasury bonds]. But there is also a lot of capital coming out of the Middle East, so I don't see the U.S. as vulnerable to China. But Latin America .and certainly the Asian countries that supply China with raw materials and parts would be hit.
Read more views at the link above.

China's economic growth has been impressive up to this point, although the underlying economic infrastructure of China remains less solid and substantial than most analysts would like.

If China can reform its banking industry, and sell off the non-performing state owned enterprise sector, it would go a long way toward reassuring the more savvy foreign investors of China's long term commitment to eliminating corruption, and solidifying its economic foundations.

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Blogger brian wang said...

the state owned enterprises, banks and non-performing loan problems seem manageable.


2006 good year for china SOE

CHINA: China rejected a proposal on Dec. 22 to break up the Agricultural Bank of China as part of a plan to sell shares and cut its record bad loans. As much as 26.2 percent of Agricultural Bank's $356 billion in loans last year were nonperforming, almost half of which came from state-directed lending to farmers and unprofitable rural loans. Agricultural Bank is the largest lender to the country's 800 million farmers. A bailout of the bank may cost more than $200 billion, or 13 times the money spent recapitalizing Industrial and Commercial Bank of China, China's largest bank by assets. The government wants to attract investors to the weakest of China's four biggest banks, but unless the government is willing to offer compensation for the bad loans somehow, investors will not be interested.
In total maybe another $500-900 billion bailout of banks and SOE in order to rationalize them. Somewhat like the US S&L restructuring.
Big but affordable

Friday, 01 June, 2007  
Blogger al fin said...

Brian, you must understand the huge degree of uncertainty in predicting such things. That is why there are international markets, so that each person and institution can "bet" their own hunches.

If we were each betting our hunches, I suspect we would bet differently from each other.

Monday, 04 June, 2007  

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“During times of universal deceit, telling the truth becomes a revolutionary act” _George Orwell

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