Euro-zone debt crisis complicates China's policy-making

Updated: 2011-09-26 10:43


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BEIJING -- The job of China's policymakers to tailor macro measures to better manage inflation and economic growth is becoming increasingly complicated as the euro-zone's debt woes escalate.

"China once again stands at a crossroads, facing mounting uncertainties both inside and outside of the nation," said Zhang Ming, a researcher at the Financial Institute with the Chinese Academy of Social Sciences.

Worries over the likelihood of Greece defaulting have intensified as EU members decide whether to provide more financial support to the highly indebted and almost insolvent nation.

The prospect of the euro zone recovering anytime soon has been eroded by Standard & Poor's cutting Italy's credit rating -- highlighting market concerns that the zone still has no feasible strategy to eject itself from its current predicament.

Owning the vast majority of government debt, European banks are suffering the most. Reports say Bank of China (BOC) has halted forex trading with the banks Societe Generale and BNP Paribas, after their credit ratings were downgraded by the Moody's. But BOC has declined to comment.

Unlike the US debt crisis, which threatens China's forex reserves, the worsening euro-zone debt woes is a direct blow to the nation's exports and may further increase inflationary pressures, according to analysts.

Ma Jun, an economist with Deutsche Bank, said the size of EU debt held by BOC is about 1 billion yuan ($56.74 million). While the amount held by other Chinese banks is infinitesimal.

Debt crisis: no immediate solutions

Huang Lin, an analyst with Dongwu Securities, said the crisis reflects the euro zone's structural flaws which can hardly be resolved due to the troubles of running 17 different budget politics under one monetary policy.

To establish an independent fiscal system would be an effective way to resolve the crisis, but "the decision for EU members to give up their financial powers will be difficult," Huang said.

Zhu Jianfang, chief economist of CITIC Securities, shared these views, saying that the EU's ongoing rescue efforts are ineffective.

Its bond-buying program has failed to address the EU's core problems -- divided fiscal polices and lacking financial constraints, while expanding the balance sheet of the EFSF (European Financial Stability Facility) among the EU members would be hard, and its effects would be limited if used to help larger EU economies such as Italy, whose debt will be four-fold that of the combined total of Greece, Portugal and Ireland's by 2012, Zhu said.

The EFSF, with an effective capacity of 440 billion euros, has so far been used to provide emergency loans to Portugal and Ireland.

Liao Shuping, an analyst with BOC, suggested that the government should plan an emergency response to impact of a possible Greece default.

Impairing exports

The worsening euro-zone debt crisis has increasingly affected China's exports to the EU, the nation's largest trading partner.

Data with the General Administration of Customs show that China-EU trade started to trend down in the second quarter of last year. In the first eight months this year, the nation's exports to the EU rose 18.5 percent, lower than the average growth rate of 23.9 percent for the past 10 years.

Zhu said the effects had not yet been fully felt. It would take time for the storm to hit China's real economy through trade, he said, adding that rising demands from Japan's post-disaster reconstruction and emerging markets had offset the shrinking China-EU trade.

"With the debt stress, economic recoveries in major EU members will undoubtedly decelerate," Zhu said, adding "the nation's exports will bear even greater pressures in the future." Exports to the EU currently make up 20 percent of the nation's total.

Bian Weihong, also a BOC analyst, said EU's austerity measures will squeeze domestic demand and its financial difficulties will give rise to trade protectionism, making the situation unfavorable for the nation's exporters.

Shen Danyang, a spokesman of the Ministry of Commerce, said on Sept 20 that the sovereign debt crisis will definitely have an impact on China-EU trade, predicting slower export growth in China and more trade frictions with the EU.

Increasing inflationary pressures

Meanwhile, the debt crisis has made it more difficult for emerging markets to combat inflation. Zhuang Juzhong, senior economist of Asian Development Bank's Regional Economic Monitoring Unit, has forecast that overall inflation in Asia's developing countries will reach 5.8 percent this year.

Bian also expected the developed nations to maintain low interest rates and loose monetary policies.

"If the EU opens the printing machine, global inflation will further go up," Bian said.

"The government should reevaluate its tightening policies and take steps to make structural adjustments in accordance with its domestic inflation situation," she said.

China's consumer inflation data rose to 6.2 percent year-on-year in August, well above the government target ceiling of 4 percent. The country has adopted curbing inflation a top priority this year and imposes a prudent monetary policy.