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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

July 27, 2009 at 10:00 AM

China’s new boom carries big risks — for U.S., too

Top of the News: As high-level talks begin between U.S. and Chinese officials, much is being made of China’s first-half GDP growth of 7.1 percent, which surpassed expectations and stands in contrast to the contraction in the U.S.

The stakes, of course, are high. In addition to being a major trading partner of Washington state, China holds some $2.2 trillion in dollar reserves, accumulated during the boom, when China essentially financed American purchases of its exports. Yet China is not as strong as the numbers suggest.

For one thing, those huge holdings of American dollars and debt, limit China’s options, at least in the near term. There’s not going to be an immediate swing to another reserve currency. It’s a co-dependency as risky for China as for America.

RGE Monitor predicts that China’s will grow “well below trend” in 2009 and 2010. The culprits: Weakness among its trading partners and the risks of its own aggressive stimulus. Without the kind of safety net enjoyed by advanced countries, China must keep pumping up output to ensure jobs. Analyst Vitaliy N. Katsenelson, writing in Foreign Policy, says China risks a much bigger bubble than in stocks.

And that could be a whole new shock to the world financial system, just recovering from the crash that originated on Wall Street.

The Back Story: Today’s housing report is being touted in some quarters as not merely a sign of bottom but of recovery. Sales of new houses increased in June by the largest amount in eight years.

Some perspective: This is being driven by lower prices, as well as (“Danger, Danger, Will Robinson”) low interest rates. While another bubble is unlikely, a mini-bubble is highly possible. More to the point: The lower prices continue to erode the wealth of millions of house owners and sellers, wealth that papered over what had been years of stagnant wages, and are now actually falling wages.

Today’s Econ Haiku:

The people who say

“Climate change is a hoax” have

Air conditioning

Check out the winner of last week’s haiku context.

Comments | More in Housing, Macro/Big picture, Trade

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