China alerted on possible Greek Eurozone exit

Updated: 2012-06-15 18:30


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BEIJING - China must take precautions against a possible exit by debt-ridden Greece from the Eurozone, which would cause turbulence on global financial markets and hurt exports and growth, government economists and analysts have warned.

The world's second-largest economy might see its year-on-year growth dip below 7 percent if Greece leaves the Eurozone under current circumstances, according to Ba Shusong, an economist with the Development Research Center of the State Council, or China's Cabinet.

"That scenario and especially its impact on employment would be undesirable for the Chinese government," Ba told Xinhua in an email interview.

His comments come ahead of national polls in Greece on Sunday, with global investors fearing a left-wing coalition government will emerge from the election and tear down the bailout deals that have kept Greece afloat since 2010, leading to default and an exit from the Eurozone.

Financial turbulence in Europe was a major driver of China's economic downshift early this year as it reduced external demand markedly, and a Greek exit from the Eurozone will make the situation worse, Ba said.

He urged authorities to follow developments in Europe closely and adjust economic policies in line with the changes.

China should reduce holdings of assets in peripheral countries of the Eurozone if Greece moves toward an exit gradually, Ba suggested.

To offset external impact with domestic demand, the government must continue to maintain investment growth, carry out structural tax reduction and boost the role of private capital, he added.

There is a strong possibility that Greece will drop out of the Eurozone in future if economic turmoil continues in the region, although it is unlikely it will happen immediately, Ba estimated.

The economist noted that if Greece stays in the Eurozone, China's exports will pick up after bottoming in the second quarter of 2012 and there should not be any massive fiscal stimulus like the 4-trillion-yuan (634 billion U.S. dollars) investment plan rolled out in late 2008 to counter the global financial crisis.

China's economy expanded at its slowest rate in nearly three years in the first quarter of 2012, growing 8.1 percent year on year, as the European sovereign debt crisis diminished export orders and a subdued property sector cooled investment.

Export and industrial output growth rebounded slightly in May from lower-than-expected levels in April, but fixed-asset investment and retail sales continued to slow, according to official data.

Exporters were advised to prepare for fluctuation in the euro's value against the yuan, which will incur greater risks of exchange losses.

The euro is expected to continue depreciating against the yuan in the near future and Chinese firms can use forward foreign exchange contracts and other financial derivatives to hedge exchange risks, said Ye Yaoting, a foreign exchange analyst with the Bank of Communications.

Companies should change euros into U.S. dollars or the yuan and receive future payment in non-euro currencies as far as possible, advised Wan Chao, investment manager of Ping An Asset Management Co., Ltd..

The European Union is China's largest trading partner. Its trade with China edged up 1.3 percent year on year in the first five months of 2012, compared to the 7.7 percent growth of the country's total foreign trade.

Meanwhile, Chinese banks have been scaling back financial derivative trading with European banks to reduce exposure to risks.

The Bank of China, China's third-largest lender, suspended buying derivatives such as credit default swaps from French banks Societe Generale and Credit Agricole at the end of 2011.

The Industrial and Commercial Bank of China and the Bank of Communications have also reduced investment product transactions with Societe General, Credit Agricole and another French lender BNP Paribas, according to the banks' reports.

Although China's financial sector has very limited exposure to sovereign and bank asset risks in the Eurozone, massive capital outflow from risky markets will implicate the Asian country if Greece breaks away from the euro, Yu Yongding, a former central bank advisor, was reported as saying in late May.

China's central bank and other departments should consider measures including capital controls, capital market suspension and contingency fund injections to counter the impact of a possible Greek withdrawal, Yu proposed.