UN report warns of slowdown

(China Daily)
Updated: 2007-01-12 07:19

NEW YORK: The Chinese economy is not immune to a slowdown in the global economy, particularly if it is caused by turbulence in the US economy, a UN report warned on Wednesday.

According to the UN World Economic Situation and Prospects 2007, China is expected to grow at a robust rate of 9 percent this year, slightly less than the 10.5 percent estimated for 2006.

Exports have grown at a rate of more than 20 percent per year since its accession to the World Trade Organization five years ago. Should this trend continue, China would become the largest exporting economy in the world by 2009.

However, the brisk expansion of the country's exports is largely based on processing of imported intermediate goods, the UN report noted. About 60 percent of China's exports fall into the "processing trade" category, in which value-added margins are slim.

Because the United States is a key export market for China, the situation makes the Chinese economy vulnerable to a possible US-led global slowdown.

The report also considered a more pessimistic scenario in which housing prices in the United States continued their plunge, pushing US economic growth below 1 percent for this year. Should this happen, economic growth in China would drop to as low as 5 percent this year, the report said.

During 2006, China's current account surplus increased to about $200 billion. Continuing export surpluses have allowed China to accumulate the world's largest foreign-exchange reserves, which are currently at $1 trillion.

The country's large external surplus has led to increased international pressure from countries that have current account deficits with China, especially the United States, which have demanded that China revalue its currency. The situation has also given rise to protectionist actions against Chinese exports.

A more flexible exchange-rate policy could be part of the solution to this problem, but from the Chinese perspective any change to the exchange rate should be aligned with its ongoing effort to reform its financial system, the report recommended.

Referring to the state of China's domestic economy, the UN report noted that the country has apparently not succeeded in solving its unemployment problems. The report said creating more jobs remains a key policy challenge for the Chinese economy.


(China Daily 01/12/2007 page1)

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