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Economic Forecasts

China: How Its Slowdown Will Affect the U.S.

China’s economy is slowing visibly, diluting its impact as the major engine of global economic growth. Will that blunt the fragile U.S. recovery as well?

There’s no question that China’s economy is losing steam. The fast-rising economic juggernaut grew by only 7.6% during the year ending in the second quarter, it reported last week. That’s the slowest growth China has posted since the 2008 global financial collapse, and far below the 10%-12% pace it typically enjoyed before the recession.

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SEE ALSO: New U.S.-China Rivalry: Vying for Asia's Trade

But China isn’t headed for anything like recession -- or even a hard landing, as some forecasters have feared. Though the growth rate of 7.5%-8% now predicted for the second half of 2012 won’t match China’s previous growth rates, it’s not a terrible performance, either. Compare it, for example, with the U.S.’s 2% pace of growth: an anemic recovery, but still not a recession.

The slowdown in China is big enough, however, to have a modest impact on the global economy. China has been the single biggest contributor to global growth in recent years. Exporters from Europe and several Asian countries will be particularly hard-hit, and the overall world economy will lose some momentum.

By itself, the Chinese slowing can’t push the U.S. economy back into recession. But it does add to the already large risks posed by the continued disarray and economic slump in Europe and the prospect of Congress failing to avert the looming fiscal cliff -- deep, mandatory across-the-board budget cuts and tax increases scheduled for 2013.

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In addition, the Obama administration’s hopes that China will move further away from being an export-led economy to one fueled more by domestic consumption, which presumably would spur more buying of U.S.-made products, also will be put on hold. China hadn’t made much progress before the current slowdown began and isn’t likely to now.

The slowdown may even prompt the country to return to relying on exports to boost its economic growth rate. That would mean more state support for exporting industries -- through subsidies and preferences -- plus increased tariffs and regulatory restrictions, new restraints on foreign imports and limiting any further increase in the value of the yuan.

Watch for a more defiant posture from Bejing on the geopolitical front as well, the classic blame-the-foreigners ploy, which China often adopts to divert public attention from an economic squeeze. Among the possible signs: more strident Chinese rhetoric and angrier responses to disputes over the Spratly Islands and the South China Sea.

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It’s not clear where the Chinese economy will go from here. Although some forecasts predict that the slowdown has hit bottom and China will begin growing faster over the next few months, it’s also possible that its economy has shifted in some fundamental way, and that growth will continue at a 7%-8% pace indefinitely.

That’s what happened to Japan in the early 1970s. After growing at a double-digit rate for most of the 1960s, Japan’s economy slowed to a more sustainable pace once it had matured. Despite the slower growth, Japan remained an economic powerhouse well into the 1980s. China may be headed into the same kind of transition.

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China itself doesn’t seem as worried as its trading partners do. Chinese leaders have said for months that they want to see growth cool to between 7.5% and 8.5% a year. The slowing has helped ease the property-buying bubble and roaring inflation that followed the nation’s 2009 stimulus package. And there’s no job shortage requiring more stimulus.

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Indeed, the steps that Beijing has taken over the past few months to try to spur faster growth have been relatively modest. The central bank has cut interest rates somewhat and reduced the level of reserves that banks are required to hold. But neither has been of the size and at the pace that leaders ordered at the start of the 2008-2010 recession.

Technically, China can easily afford to finance a second major stimulus package. It has massive reserves (and massive needs). But there also are some constraints: Both government debt and household debt are rising. Banks aren’t eager to lend more for property buying. And any quick-payoff construction projects have already been built.

Moreover, China doesn’t want to repeat the aftereffects of the 2009-2010 stimulus package. Though it kept the economy from plunging into a recession, it left behind a hangover of soaring inflation and a property price bubble. Thanks to the slowdown, the inflation threat has ebbed, and the bubble is easing.

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