US set to gain from China slowdown, says report

A soya bean oil production line at a factory in China. While prospects for the Chinese economy remain favourable overall, a steep increase in company debt and opaque financial linkages pose non-negligible risks, Bundesbank said in its monthly report.
A soya bean oil production line at a factory in China. While prospects for the Chinese economy remain favourable overall, a steep increase in company debt and opaque financial linkages pose non-negligible risks, Bundesbank said in its monthly report.PHOTO: AGENCE FRANCE-PRESSE

Lower prices in Asian country can boost American output, says German central bank

FRANKFURT • The US will likely benefit from a sharp slowdown in China's economy even as the rest of the world suffers, according to calculations by Germany's Bundesbank.

What may seem like a counter-intuitive scenario has its roots in trade relations. The United States, the world's largest economy, imported goods worth more than US$500 billion (S$681 billion) from China last year, over three times as much as it exported to the country.

The Bundesbank says lower prices in the Asian nation because of weaker growth would be a stimulus for US private consumption and investment, bolstering American output by as much as 0.2 per cent over two years.

The estimate also assumes the Federal Reserve would react more strongly to a Chinese slowdown than the European Central Bank when setting monetary policy.

While prospects for the Chinese economy remain favourable overall, a steep increase in company debt and opaque financial linkages pose non-negligible risks, the German central bank said in its monthly report. Standard economic models based on expectations of a general demand shock may understate those risks, it said.

That is a concern for much of the world economy.

  • 0.2% Expected rise in US output over two years if there is a sharp slowdown in China's economy, according to Bundesbank.

History shows that the financial crises that follow extraordinary credit growth have a more pronounced impact on domestic investment than on private consumption.

Since Chinese investment tends to draw on imports such as machinery, countries providing those goods - including Germany - may be more exposed than widely assumed.

Using an adjusted model, the Bundesbank calculates that global gross domestic product without China would be damped by 1 per cent over two years, instead of the 0.7 per cent estimate in a standard model.

The central bank cautioned that even those predictions might turn out to be too optimistic.

The models assume a stable Chinese currency and do not take into account a potential deterioration in global economic confidence.

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A version of this article appeared in the print edition of The Straits Times on July 25, 2018, with the headline 'US set to gain from China slowdown, says report'. Print Edition | Subscribe