China not immune to global slowdown, warns UN

The Chinese economy is not immune to a slowdown in the global economy, even more so if such a slowdown is dragged by the US economy, warned a UN report on Wednesday.

According to the UN World Economic Situation and Prospects 2007, released on Wednesday, China is expected to grow at a robust pace of 9 percent in 2007, only a slight moderation from the 10.5 percent growth rate estimated for 2006.

China's exports have grown at a pace of more than 20 percent per year since its accession to the WTO five years ago. Should this trend continue, China would become the largest exporting economy in the world by 2009.

However, this spectacular export growth is largely based on further processing of imported intermediate goods, the UN report noted. About 60 percent of China"s exports can be categorised as such "processing trade” with slim value-added margins.

As also the United States is a key export market for China, this trade structure makes the Chinese economy vulnerable to a US -led global slowdown.

The report also considered a more pessimistic scenario, however, under which house prices in the United States would make a more significant dive and push US economic growth below 1 percent in 2007.

Should this happen, then economic growth in China would drop to a much lower 5 percent in 2007, it added.

During 2006, China's current account surplus increased further to about 200 billion dollars. Continued export surpluses have allowed China to accumulate substantial amounts of official foreign-exchange reserves which now have reached a level of more than 1 trillion dollars, the highest in the world.

The large external surplus of China has led to increased international pressure from countries of current account deficits, especially the United States, demanding China revalue its currency, the RMB, and also has given rise to protectionist actions against Chinese exports.

A more flexible exchange-rate policy could be part of a concerted solution, but from the Chinese perspective should be aligned with its ongoing reforms to strengthening its financial system, recommendaed the world body in the report.

On domestic aspects of the Chinese economy, the UN report pointed out China apparently has not succeeded in solving its unemployment problems.

The report considered that creating more jobs remains a key policy challenge for the Chinese economy.