Thu, Oct 26, 2006 - Page 11 News List

US slowdown could hurt China's economic growth

LIKELY SCENARIO A commission report made public yesterday indicated that a cooling US economy next year could engender single-digit growth for China


Economic growth in China could slip back into single-digit territory next year under the impact of a US slowdown, China's top planner said yesterday.

A cooling US economy will likely have a negative impact on Chinese exports while on the plus side, China will benefit from falling prices of oil and other raw materials, the National Development and Reform Commission said in a report.

"We believe that economic growth will drop below 10 percent in 2007," the commission said in its report, published in the China Securities Journal.

"Investment, industrial production and exports will all see a relatively obvious correction," it said.

China's economy, which expanded by 10.7 percent in the first three quarters, will likely grow 10.6 percent for all of this year, the commission said.

"As the US economy may see a rather significant correction, Chinese exports could see a fairly large impact," the commission said.

"But at the same time, a weakening of prices of oil and other raw materials will be beneficial for economic development," it said.

The forecast is in line with estimates for next year by major investment banks, which also predict single-digit growth next year, even after recent upgrades of their predictions for the world's fourth-largest economy.

Deutsche Bank has upgraded its forecast from the previous 8.9 percent to 9.5 percent, basing its revision on an "increasingly benign policy outlook as well as the healthy state of the economy."

JP Morgan raised its forecast for next year from 9 percent to 9.5 percent and said Chinese authorities would probably seek to further tighten liquidity, seeing a two-thirds chance of another interest rate hike before the New Year.

The commission also said China needed to pay more attention to interest rate tools in controlling economic growth, rather than adjustments to the yuan's exchange rate.

China can increase benchmark interest rates "at an appropriate time" next year, and should move to reduce expectations of a yuan appreciation, keeping the currency basically stable, it said.

But it added the introduction of some flexibility was warranted, including a widening of the yuan trading band.

Currently, the exchange rate is not allowed to move outside a 0.3 percent trading band around a parity rate set by the central bank at the start of every trading session.

The commission said that the government must implement macroeconomic measures more firmly.

Specifically, it needs to control new development projects, curbing excessive growth in fixed-asset investment and preventing rapid price rises in the property market.

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