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China insulated from European debt woes ... for now
By John Lorié |
February 14, 2012, Tuesday
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Print Edition
Print Edition
IN recent months, it would have been easy to view the Eurozone debt crisis as something similar to a pinball machine, where there often appeared to be no real control of the issue. Every time a possible solution looked close to completion, events overtook it and the pinball of uncertainty careered off in a new direction, leaving politicians and bankers to consider their next move.
There's no denying that the severity of the situation and the continued media exposure of the issue, together with the widespread speculation on how the crisis would impact specific world markets if the Eurozone should implode, has drawn a lot of attention from around the globe, including China.
The recent intervention by the European Central Bank with its new and extensive long term refinancing operation drawn for an amount of 489 billion euros has started to provide some cohesive stability and provide Eurozone banks with access to low cost loans, which are intended to help them stay liquid through the debt crisis.
However, while the uncertainty and volatility may have receded slightly, the Eurozone still has an uphill battle to generate positive GDP growth during 2012, especially as some forecasts are predicting a small negative growth for at least part of the year. European exports to China may help, supported by the lower euro exchange rate.
In this respect, it is a hopeful sign that exports from Europe to China almost doubled compared to last year. The EU's ambassador to China, Markus Ederer, has highlighted the fact that the country could become Europe's biggest export market during 2012, surpassing the US as Chinese domestic demand increases.
So, with the exports from the Eurozone to China as a benign effect for Europe, China will wonder what impact the debt crisis is likely to have on China's economic development.
Small proportion
China's relationship with Europe in terms of exports has always been strong and the EU is recognized as the biggest market for Chinese goods with trade reaching almost US$570 billion during 2011. However, to put China's EU exports into some perspective, only around 15 percent of its export revenues are generated from the Eurozone and of this, approximately one third is despatched to one country, Germany. The remainder is an aggregated figure covering the other 16 countries, none of which are anticipating achieving the same GDP growth levels expected in Germany.
So, as the Eurozone accounts for a relatively small proportion of total export figure, it seems unlikely that even a dramatic failure in Europe would have a long term effect on China, especially as there is an increased focus on growing domestic consumption while avoiding "overheating" the economy.
Moreover, China's financial system is relatively closed. Therefore, large withdrawals of funds by the banking sector as a result of the debt crisis are unlikely to occur in China. Moreover, the effect hereof would be limited anyway as China has a huge foreign exchange position.
Nevertheless, China's strong global position and massive foreign exchange reserve of more than US$3 trillion has already attracted interest and repeated requests from European leaders, to support a "bailout" fund, which would help support EU economies and businesses.
While no commitment has been made, if Europe did appear as if it was facing financial meltdown, China could choose to intervene to protect a key export market to maintain some continuity in demand and in that way minimize the impact.
Mild recession
Even so, this hasn't stopped the International Monetary Fund from suggesting that the Euro crisis, when really running out of control, could virtually halve China's growth rate, although it recognizes that the country's historically disciplined fiscal management at least provided "room to manoeuvre" to reduce the financial shock of a downturn.
The real issue is that, with the Eurozone now facing what looks like a mild recession, export trade to Europe could become more risky. EU businesses continue to find access to affordable finance difficult in order to maintain cash flow and pay invoices. So at a micro level, it is logical for Chinese companies to ensure they get paid by ensuring their trade is protected.
While the Euro crisis continues, there is always a risk to China, specifically for its exporters. For the Chinese economy as a whole, the effect of the Eurozone crisis seems limited. And, with Europe currently in its most stable position in months, for the moment it looks as if even this level of risk is diminishing.
John Lorié is Chief Economist at Atradius Group, which provides trade credit insurance, surety and collections services.
There's no denying that the severity of the situation and the continued media exposure of the issue, together with the widespread speculation on how the crisis would impact specific world markets if the Eurozone should implode, has drawn a lot of attention from around the globe, including China.
The recent intervention by the European Central Bank with its new and extensive long term refinancing operation drawn for an amount of 489 billion euros has started to provide some cohesive stability and provide Eurozone banks with access to low cost loans, which are intended to help them stay liquid through the debt crisis.
However, while the uncertainty and volatility may have receded slightly, the Eurozone still has an uphill battle to generate positive GDP growth during 2012, especially as some forecasts are predicting a small negative growth for at least part of the year. European exports to China may help, supported by the lower euro exchange rate.
In this respect, it is a hopeful sign that exports from Europe to China almost doubled compared to last year. The EU's ambassador to China, Markus Ederer, has highlighted the fact that the country could become Europe's biggest export market during 2012, surpassing the US as Chinese domestic demand increases.
So, with the exports from the Eurozone to China as a benign effect for Europe, China will wonder what impact the debt crisis is likely to have on China's economic development.
Small proportion
China's relationship with Europe in terms of exports has always been strong and the EU is recognized as the biggest market for Chinese goods with trade reaching almost US$570 billion during 2011. However, to put China's EU exports into some perspective, only around 15 percent of its export revenues are generated from the Eurozone and of this, approximately one third is despatched to one country, Germany. The remainder is an aggregated figure covering the other 16 countries, none of which are anticipating achieving the same GDP growth levels expected in Germany.
So, as the Eurozone accounts for a relatively small proportion of total export figure, it seems unlikely that even a dramatic failure in Europe would have a long term effect on China, especially as there is an increased focus on growing domestic consumption while avoiding "overheating" the economy.
Moreover, China's financial system is relatively closed. Therefore, large withdrawals of funds by the banking sector as a result of the debt crisis are unlikely to occur in China. Moreover, the effect hereof would be limited anyway as China has a huge foreign exchange position.
Nevertheless, China's strong global position and massive foreign exchange reserve of more than US$3 trillion has already attracted interest and repeated requests from European leaders, to support a "bailout" fund, which would help support EU economies and businesses.
While no commitment has been made, if Europe did appear as if it was facing financial meltdown, China could choose to intervene to protect a key export market to maintain some continuity in demand and in that way minimize the impact.
Mild recession
Even so, this hasn't stopped the International Monetary Fund from suggesting that the Euro crisis, when really running out of control, could virtually halve China's growth rate, although it recognizes that the country's historically disciplined fiscal management at least provided "room to manoeuvre" to reduce the financial shock of a downturn.
The real issue is that, with the Eurozone now facing what looks like a mild recession, export trade to Europe could become more risky. EU businesses continue to find access to affordable finance difficult in order to maintain cash flow and pay invoices. So at a micro level, it is logical for Chinese companies to ensure they get paid by ensuring their trade is protected.
While the Euro crisis continues, there is always a risk to China, specifically for its exporters. For the Chinese economy as a whole, the effect of the Eurozone crisis seems limited. And, with Europe currently in its most stable position in months, for the moment it looks as if even this level of risk is diminishing.
John Lorié is Chief Economist at Atradius Group, which provides trade credit insurance, surety and collections services.
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