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China is leading world recovery amid uncertain forecast

(Xinhua)
Updated: 2009-07-27 09:04

WASHINGTON: China is leading the world economic recovery based on fresh data from the first half of the year, Fred Bergsten, director of the influential think-tank Peterson Institute for International Economics, said in a recent exclusive interview with Xinhua.

Although China's export growth remained negative compared to numbers from the same period last year, Bergsten said the fact that China's trade surplus came down a bit is very important and helpful, "because that gave support to other countries to enable them to take advantage of the Chinese boom in order to get recovery themselves."

He noted that China's import ability during a gloomy world economy is particularly helpful in the rest of Asia.

With second quarter GDP growth at 7.9 percent, China remains the world's fastest growing economy, while US GDP growth stays in the red for the first six months of 2009.

Larry Summers, director of the National Economic Council and the top economist in the United States government, said last week that the US economic stimulus package had worked to stop the " free fall" of the country's economy.

But Bergsten, a close friend of Summers, is hesitant to predict the worst is over.

"The really tricky question is transitioning from the recovery which is driven by government stimulus programs, to a more sustained growth based on the more normal kinds of private sector demand, private investment and the like," he said. "That we just don't know."

He cautioned governments whose national economies showed signs of recovery to closely monitor the composition of the growth over the next 6 to 12 months, during which the economies are designed to graduate from the "recovery" phase to "real growth" phase.

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"If it's handled well, the recovery could continue. If it's not handled well, we could have a second downturn and a double-dip recession," Bergsten warned.

Scheduled to meet top Chinese officials during the upcoming Sino-US Strategic and Economic Dialogue, Bergsten believes the recovery of the world economy will top the dialogue agenda. Another key area high on the US list is climate change.

For the Chinese side, the safety and value of its foreign reserve in US dollars, the largest in the world, remains a concern.

Bergsten suggested China to diversify its foreign reserve currencies, gradually reduce the percentage of US dollar holdings in its total reserve, and diversify its investment portfolio in order to avert potential risks.

He said the United States welcomes foreign direct investment, particularly at a time when its domestic lending activities are reduced to historic lows and the government incurred large budget deficit that needs to be financed.

In order not to raise political outcry from Chinese or other foreign investment, Bergsten said it's more prudent for foreign capital investors to enter the US market with a minority position.

"It's better for China to make 20 investments with 5 percent interest than one investment with a 100 percent interest," he said.