ANDREW K. COLLIER in Beijing

Beijing could be on the brink of an explosive trade war with Washington that could damage an already shaky global economy, according to a top US analyst.

Stephen Roach, chief economist at Morgan Stanley, said the threat was mainly caused by leaders in the United States who had failed to rein in the deficit and American consumers who spent more than they earned.

"The risk of protectionism will rise largely because the Bush administration refuses to accept responsibility for pushing down US savings," Mr Roach said.

"Through reckless fiscal policies, there are early signs Asia and China are prepared for the likelihood that trade tension could accelerate due to actions largely taken in Washington."

Mr Roach said Beijing should watch the US Congress carefully for hints of new protectionist legislation.

"Japan was the scapegoat in the 1980s. China is at the top of the list of being a scapegoat today," he said.

The biggest problem is America's rising current account deficit, which had ballooned to 5.7 per cent of gross domestic product in the middle of this year, from 4.5 per cent last year. To pay for the flow of imported cars, refrigerators and other goods, America has relied on foreign purchases of dollar-denominated assets, providing capital for consumption in the US.

But those purchases are drying up. Eventually, as foreign countries continue to buy fewer US assets, the dollar will fall.

Mr Roach said he expected the dollar to lose 10 per cent to 15 per cent in value over time. But because many Asian countries had fixed exchange rates they would resist the pull to devalue their currencies because of concerns that exports would actually decline.

As a result, the value of the yuan would increasingly be part of a debate on trade issues between Beijing and Washington, Mr Roach said.

"America must fix its budget deficit, but there are also adjustments required of Asia, and those would include more flexible currency policies, and that would certainly include China," he said.

Meanwhile, Mr Roach had high praise for the mainland economy, saying the risk of overheating had fallen dramatically since the central bank raised interest rates.

In the past three months, there had been a slowdown in the rise of credit, fixed-asset investment and industrial output, but he warned that authorities would have to continue to reduce spending.

"I don't think the authorities are overly confident but remain committed to policies aimed at containing excess expansion," he said.

Beijing also continued to support reform of the state banks, "a critical instrument" for improving economic control, he noted.