US economy set to benefit from China slowdown as world suffers: Bundesbank

[FRANKFURT] The US would probably benefit from a sharp slowdown in China's economy even as the rest of the world suffers, according to calculations by Germany's Bundesbank.

What may seem like a counter-intuitive scenario has its roots in trade relations. The US, the world's largest economy, imported goods worth more than US$500 billion from China last year, over three times as much as it exported to the country.

The Bundesbank says lower prices in the Asian nation because of weaker growth would be a stimulus for US private consumption and investment, bolstering American output by as much as 0.2 per cent over two years. The estimate also assumes the Federal Reserve would react more strongly to a Chinese slowdown than the European Central Bank when setting monetary policy.

While prospects for the Chinese economy remain favorable overall, a steep increase in company debt and opaque financial linkages pose non-negligible risks, the German central bank said in its monthly report. Standard economic models based on expectations of a general demand shock may understate those risks, it said.

That's a concern for much of the world economy. History shows that the financial crises that follow extraordinary credit growth have a more pronounced impact on domestic investment than on private consumption. Since Chinese investment tends to draw on imports such as machinery, countries providing those goods - including Germany - may be more exposed than widely assumed.

Using an adjusted model, the Bundesbank calculates that global gross domestic product without China would be damped by 1 per cent over two years, instead of the 0.7 per cent estimate in a standard model.

The central bank cautioned that even those predictions might turn out to be too optimistic. The models assume a stable Chinese currency and don't take into account a potential deterioration in global economic confidence.

BLOOMBERG