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Editor's note: Shang-Jin Wei is the former Chief Economist of the Asian Development Bank, professor of Finance and Economics at Columbia University and a visiting professor at the Australian National University. The article reflects the author's opinions, and not necessarily the views of CGTN.|
The recent inversion of the yield curve in the United States – with the interest rate on ten-year U.S. government bonds currently lower than that on short-term bonds – has raised fears of a possible U.S. recession later this year or in 2020.
Yet, paradoxically, a downturn in America could help to improve bilateral economic relations with China and cool the two countries’ escalating trade dispute.
Recent history offers grounds for such predictions. True, by reducing import demand, U.S. recessions normally have a negative impact on economies with a high trade-to-GDP ratio, including China. However, in recent downturns, the U.S. also has been more willing than normal to cooperate with China in order to try to spur recovery.
During the last major U.S. recession in 2008-10, for example, China appeared to be the only major economy able and willing to boost global demand. Partly as a result of this, Sino-American ties improved, and the U.S. even advocated giving China a greater voice in international bodies such as the International Monetary Fund and the G20.
Similarly, U.S.-China relations were at a low ebb in mid-2001, following a mid-air collision of a U.S. reconnaissance plane and a Chinese fighter jet over the South China Sea, which resulted in the death of the Chinese pilot and the capture of the American crew. But after the September 11, 2001, terrorist attacks suddenly darkened the U.S. economic outlook, U.S.-China economic ties improved.
Unlike its predecessors, U.S. President Donald Trump’s administration may not have international cooperation in its DNA.
But, tellingly, Trump initiated the current tariff war when the U.S. economy was somewhat overheated, partly as a result of the aggressive tax cut that he pushed through Congress in late 2017. Frictions with America’s trading partners, which many economists believe are damaging both the U.S. and the global economy, may in fact be helping to cool down the U.S. economy.
But Trump’s stance on China may soften, should a recession materialize.
Two factors could derail this possibility.
First, China may be unable or unwilling to provide economic stimulus. The Chinese government’s debt-to-GDP ratio is higher today than it was a decade ago, when the authorities rolled out an aggressive stimulus package to offset weakening export demand in the wake of the global financial crisis. That fact would seem to limit the government’s capacity to pursue an expansionary fiscal policy in the event of a U.S. recession.
Even so, China’s debt-to-GDP ratio is still much lower than that of most other large economies, giving the government some room for additional fiscal stimulus in an economic emergency. Moreover, although the People’s Bank of China is more cautious about injecting liquidity at will, the relatively high reserve ratio the PBOC imposes on commercial banks suggests that it would have significant firepower should the need arise.