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As the U.S. economy falters, whither China?
This is an archived article that was published on sltrib.com in 2008, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

The U.S. economy faces a massive economic downturn, with job losses on both Wall Street and Main Street, tightening credit availability and large increases in public debt. The U.S. economy is not undergoing a mere recession but a basic restructuring, as finance is transformed from a high-profit industry to a more constrained, sobered sector.

Those watching China's rise to modernity wonder what will be the effects of the U.S. economic slowdown and reconfiguration on China's real economy?

Although China's financial sector is greatly underdeveloped, growth in its real economy, driven by manufacturing, has boomed over the past couple of decades. Manufacturing growth has been spurred by increasing demand for inexpensive goods in the United States, Europe and Japan.

The range of goods produced in China is wide, from steel beams and plant machinery to toys, MP3 players and sporting goods. The United States alone has accounted for around a third of China's exports in the past few years.

But with an increasing unemployment rate, dampening consumer and business credit and declining growth, the United States may not be able to sustain its demand for goods from China. Add tightening labor regulations as well as inflation, and China is looking at a large potential manufacturing decline for the next several years.

Some argue that increasing domestic demand in China will make up for a slowdown in U.S. demand. But half of China's $600 billion GDP - $300 billion - is the amount the United States has been pumping into China's economy in the past couple of years. Domestic spending is currently around a third of GDP at about $200 billion.

This means that Chinese domestic demand would have to grow by about 25 percent to make up for a significant loss in manufacturing exports, just as the trend in Chinese domestic demand is actually decreasing in local currency terms due to a rising cost of living.

Aside from ensuring a continuing containment of inflationary pressures, several conditions would have to be met in order to make up for China's insufficient domestic demand. First, employment growth would have to be sustained even in the face of more stringent new labor laws and an immediate decrease in U.S. demand for manufactured goods.

This means that, should China's economy continue to be based on manufacturing, it will have to change what it manufactures to fit the needs of Chinese consumers, without losing jobs. Second, Chinese citizens will have to change their degree of consumption, saving much less in order to consume more goods.

All things being equal, this would dampen future growth. And finally, China would have to drastically reduce the number of people living in poverty in rural areas in order to maintain growth into the future. Each one of these conditions would constitute a major change in the Chinese economy.

The most likely scenario is that China's rapid pace of growth will be arrested as the U.S. economy is transformed. China will have to be nimble in order to adjust to dwindling overseas demand, changing its very economic core.

Underlying all of this is the fact that U.S. economic woes signal not just a short-term crisis of confidence, but a long-term structural change. Its trading partners will need to adapt accordingly.

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* SARA HSU is a visiting assistant professor of economics at Trinity University and holds a doctorate from the University of Utah. She lives in San Antonio, Texas.

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