China, US should transcend economic fears

After the equity market turmoil in the US and globally, the conventional wisdom is that the Fed will hike the interest rates in the fall, which is expected to unleash potentially adverse capital outflows.

US growth has averaged about 2.1 percent over the past three years, while unemployment is at a seven-year low of 5.3 percent. Yet long-term unemployment is worse than at any point of time since the 1940s, and the labor participation rate is as low as in the dismal 1970s.

Inflation remains pretty far from the Fed's rate-hike target of 2 percent. In the first half of the year, the US economy was haunted by disinflation. In the second half, inflation will remain around 0.5-1 percent - in a benign scenario.

Against this backdrop of slow growth and failing inflation, a premature decision to hike rates could undermine US growth prospects and the Fed's own credibility while imposing a series of new rate cuts in due time.

What further complicates the Fed's task is the soaring US sovereign debt. Despite all the rhetoric of deleveraging, that debt burden is now close to $18.4 trillion, which exceeds the size of the economy. As the Congress has failed to pass a budget for the coming fiscal year, it has elevated the risk of still another government shutdown in October.

That's not exactly a portrait of a nation amid vibrant economic recovery.

Indeed, China's economy may be more resilient, and US economy more fragile than conventional wisdom currently presumes.

What the two great nations need is not fear about each other's real or perceived weaknesses, but confidence about their respective strengths.

The author is research director of international business at the India China and America Institute (US) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).