The result may be something economists have sought for years - increased domestic demand in China and a drop in US imports, which should help rebalance a global economy that has spawned huge US trade deficits and Chinese surpluses.

This is a structural shift that will take years, but China may be forced to speed up its efforts to boost demand at home should the US economy tumble into a deep, consumer-led recession. Already, economic data shows anaemic sales in many developed economies and record sales growth inside China.

'The mighty Chinese export sector will likely hit a period of hard times, beyond the US recession,' Mr Dong Tao, Credit Suisse's chief China economist, wrote in a note to clients.

Figures due this week may underscore the soft demand in Europe and the United States. Euro zone March retail sales, due on Wednesday, are forecast to rise 0.2 per cent from a month earlier, according to a Reuters survey. They fell 0.5 per cent in February. On Thursday, US retail chains are expected to report that April sales growth was sluggish at best.

A weak reading on European demand would complicate matters for the European Central Bank, which meets on Thursday to decide interest rates. While economists polled by Reuters expect the ECB to keep rates on hold this week, some 70 per cent think the central bank will be in easing mode by year-end.

The ECB has held rates steady while its counterparts in Britain, Canada and the United States cut because its primary concern is inflation, which remains above its comfort zone as food and energy costs soar.

China plays a role there too. Not only is the developing economy buying commodities to support its rapid growth, but its exports are getting costlier.

Importing inflation
For years, the marriage of the voracious US consumer and China's unstoppable export machine seemed like a perfect match.

The United States feasted on low-priced goods that helped keep inflation in check, while China created millions of jobs for workers migrating into urban areas.

Now, China's exporters are coping with rising costs for raw materials, labour and shipping, as well as new laws requiring employers to pay overtime and contribute to social and pension funds. At the same time, Western consumers are curbing spending.

US data shows inflation seeping through the import channels.

In the first three months of 2008, US domestic demand fell for the first time since 1991. At the Port of Long Beach, California, where much of the US imports from China land, the number of cargo containers coming in fell by nearly 10 per cent in March.

Credit Suisse's Tao says one-third of the export-oriented manufacturers in China's Guangdong province will be closed in three years. But he also sees an increasingly powerful generation of young consumers who are making money and happy to spend it, boosting domestic demand.

'Our projections show China leapfrogging the US as the world's largest consumer market before 2020,' Mr Tao wrote.

Until that happens, the United States and Europe remain vital to China's economy, and there is no denying the slowdown as credit conditions tighten and inflation erodes spending.

Wal-Mart Stores, a top importer of Chinese goods, said last week that its US customers were using credit cards less often than they did a year ago, limiting their spending.

'They have gone beyond their ability to actually get any more credit,' said Mr Eduardo Castro-Wright, head of Wal-Mart's US stores. 'They topped out.' That suggests a prolonged period of subpar US consumer spending as households pare debt.

In the first three months of the year, China's retail sales surged 20.6 per cent, according to China's National Bureau of Statistics. While soaring inflation contributed to that, overall demand is clearly growing.

Mr Tao noted that the generation born in the 'one child' era, after 1980, was gravitating toward service sector jobs that pay better than factory work, and they were spending that newfound wealth. A foot masseur in Shenzhen makes an average of 2,500 yuan (S$487) a month, while a shoe factory worker makes just 1,100, he said. A waitress in Shanghai can make almost twice as much as a toy factory worker in Guangdong.

'This is the youngest group of consumers, receiving ... the highest pay among all age groups,' he wrote. 'The 'one-child' generation will redefine consumer behaviour and trends in China over the next decades.' -- REUTERS