U.S. attacks likely to hurt China's economy

U.S. attacks likely to hurt China's economy

BEIJING (Reuters): China's economy is in good shape but the terror attack on the United States, which is struggling to kick- start an economic recovery, could hurt growth, central bank governor Dai Xianglong said on Wednesday.

"China has had a high economic growth rate and high growth of money supply but because of a sharp decline in the U.S. economy, in part because of what happened yesterday, we cannot afford to be over-optimistic," he told a conference.

Three aircraft commandeered by unknown hijackers slammed into the Pentagon in Washington and destroyed the twin towers of the World Trade Center in New York on Tuesday, killing thousands.

Analysts say the attacks could send a fragile U.S. economy into a spiral.

China's Vice Trade Minister Sun Zhenyu said the attacks could cause exports to the United States to slow further and curb foreign investment in China -- two important engines for economic growth.

The United States was China's second biggest trading partner last year with China exporting goods worth US$100 billion to the United States, according to U.S. figures.

The United States has also historically been the biggest foreign investor in China, the largest recipient of foreign direct investment among developing countries.

"Exports to the U.S. market will go down and the overall investment will be affected. The United States needs more time to deal with the domestic issues," Sun told a news conference at a regional meeting in Hanoi.

China is currently the best performing economy in Asia but the global slowdown, coupled with less demand from the United States and Japan, has had an impact.

Faced with slowing export growth, China has turned to massive state spending and domestic consumption to take up the slack.

Central bank chief Dai forecast the economy would grow seven percent annually from 2001 to 2005 with inflation within three percent. Gross domestic product rose eight percent last year.

But China's normally insulated stock markets dropped sharply on Wednesday as investors worried the terror attacks could make the global economy even worse.

Listed exporters and companies which rely heavily on foreign investment were among the hardest hit.

"Although domestic demand is expected to remain strong, the incident may put pressure on China's exports later this year," said Ye Songtao, an analyst at Yangtse Securities.

China's overseas sales are already hurting from the global slowdown. Exports rose only 8.4 percent year-on-year in the first seven months of this year, well off the blistering 27.8 percent surge for all of last year.