Forget the Fed. Watch China instead

By Chris Isidore, senior writer

NEW YORK ( -- The central bank of greatest concern to investors and U.S. businesses right now isn't the Federal Reserve. It's the People's Bank of China.

The Chinese central bank tightened credit Friday by requiring banks in China to increase their reserves for the second time this year. The move once again rattled markets around the globe.

By contrast, the exit strategy that Federal Reserve chairman Ben Bernanke laid out Wednesday detailing how he expected the Fed to start tightening credit in the U.S. caused barely a ripple.

"It's a global economy and it's becoming more and more global," said David Wyss, chief economist for Standard & Poor's. "You have to pay attention to what's happening in the world's No. 2 economy." (China is technically still #3 but is poised to pass Japan once Japan reports its 2009 gross domestic product this weekend.)

Kurt Karl, chief U.S. economist for Swiss Re, said the 8.7% economic growth in China last year is a major part of the reason the global recession likely ended in the middle of 2009.

Concerns about the fragility of that recovery, especially in light of debt problems dogging Europe right now, makes any slowing of Chinese growth a reason for concern everywhere.

"China has become a big part of the engine of growth. It's stabilized the global economy through this downturn," said Karl.

But Karl and Wyss both believe the markets overreacted a bit to Friday's tightening in China.

Karl said that even with these steps and more moves expected later this year to slow the Chinese economy and keep prices in check, his firm recently raised its GDP forecast to growth of 9.4% this year. By contrast, most economists are forecasting only about 3% growth in the United States this year.

Karl said Friday's sell-off is due more to the uncertainty about Chinese policy than worries about an actual slowdown there.

"What the Fed is doing is built into the market. They've been fairly transparent," said Karl. "But the Chinese are so opaque that whenever they make a move, the timing is a surprise."

Slower U.S. exports ahead. Wyss said the biggest impact of a slowdown in China on U.S. businesses would come from reduced demand for U.S. goods.

China bought nearly $70 billion of U.S. goods in 2009, making it the No. 3 destination for U.S. exports, behind only Canada and Mexico.

In addition, Wyss said China also helps the U.S. sell more throughout Asia because countries like Japan and South Korea benefit from China's growth. Pacific Rim countries bought nearly $200 billion in U.S. goods last year, nearly matching European demand for our exports.

"Japan and Korea came out of recession sooner than later because of their exports to China, and they are big buyers of our goods," Wyss said.

Beyond that, many U.S. companies have grown to depend on their Chinese operations for sales and profits. General Motors sold almost as many vehicles in China as in the United States last year, and the Chinese market was one of the battered automaker's few profitable operations.

Nonetheless, Wyss said the tightening in China will likely shave only about 0.1 percentage point off of U.S. economic growth this year, making it more of a slight breeze than a true headwind for the recovery in the U.S.

But Wyss agreed that the Chinese central bank is doing more to slow growth than Bernanke has, despite the Fed pulling back on some of its programs that have dumped trillions into the U.S. economy in recent years.

"The Chinese are trying to slow things down," he said. "The Fed is still trying to provide a tailwind for the economy, even if it's not as strong a one." To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET


Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.