China will feel U.S. economy's pain

David Frum

TEXT OF COMMENTARY

KAI RYSSDAL: The Asian Development Bank offered a less rosy outlook than usual today. The bank says the Asian economy's looking at its slowest period of growth in five years. Slow, but still a healthy 7.5 percent rise overall. The bank's chief economist said commodity prices are fueling inflation, and that economies like China's will be closely tied to what're called the "G-3," the US, the Eurozone and Japan, for some time to come.

Commentator David Frum says that's true now more than ever.


DAVID FRUM: A lot of investors are betting that the price of oil, wheat and other commodities will stay high for some time to come. The bet certainly seems to make sense. With tens of millions of Chinese and Indians joining the developed world, demand for basic commodities should boom and keep booming. A generation ago, China ranked 20th among world oil importers. Today, it stands second.

But commodity bulls ought to consider this question. Can China prosper if the United States slumps? Probably no major economy has ever depended so much on one partner as China now depends on the United States. Eighty percent of China's GDP derives from international trade, and the United States is far and away the top destination for Chinese merchandise exports. Between 2001 and 2005, Chinese exports to the United States grew at a rate of almost 30 percent per year, but what happens if that rate of growth slows?

If Americans buy fewer electronic products, fewer running shoes, less glassware and dinnerware, Chinese households in turn must cut back their purchases of new apartments, new cars and new and costlier foods.

It's not just the household sector that will be affected. Much of America's uncertain mortgage debt is owned by Chinese investors. The state-owned Bank of China says it owns $5 billion of subprime loans, and that's on top of billions more of Chinese domestic bad debt. Some experts estimate that about half of all loans held by Chinese banks have ceased to pay interest. Bad debt imperils the credit that builds the gleaming new towers and airports of Shanghai and Beijing, and if those towers and airports stop going up, so too will the prices of the steel, copper and other materials of which they are made.

It was Napoleon Bonaparte who first observed that China's rise would shake the earth, but always remember, it is America's ups and downs that shake China.

KAI RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute. His latest book is called "Comeback: Conservatism That Can Win Again."

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