Europe debt crisis takes dent on China

https://www.chemnet.com   Jun 04,2010

The European debt crisis and the plummeting euro are taking a toll in China, as a rapidly strengthening Chinese yuan has eroded the competitiveness of its goods in Europe, the country's largest overseas market.

Insiders also said that the dwindling exports to countries like Germany, France and others in Europe will complicate Beijing's move to re-launch currency exchange rate reform, namely, breaking the yuan's peg to the U.S. dollar.

And, spreading debt problems in Europe will definitely impact the budding economic recovery worldwide, and compromise China's decision to exit from proactive fiscal stimulus and loose monetary policies.

China's ministry of commerce has lately revealed its warnings that a weaker euro has wrecked Chinese exports and hurt Chinese job market prospect.

"The yuan has risen about 14.5 percent against the euro during the last four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China's exports to European countries," Yao Jian, the ministry's spokesman, said at a news conference in Beijing last week.

Beijing has been under pressure from Washington and others for resume appreciating the yuan against the dollar, which it halted in 2008 amid a worsening global economic crisis. Entering 2010, China's foreign trade and economic growth had both picked up. However, the sudden bailout of Greece's indebted government by other European countries has cast a shadow on China's decision to move.

In light of the euro's 14.5 percent drop in value against the yuan, letting the yuan rise against the dollar would also mean a further increase in the yuan's value against the euro, creating even more problems for Chinese exports to Europe.

Addressing the annual China-US Strategic and Economic Dialogue Monday in Beijing, China's President Hu Jintao said that China will continue to steadily advance the reform of the formation of the yuan exchange rate mechanism.

Hu's words send a clear message that Beijing is considering reform the yuan seriously, but the theatrical arrival of the Europe crisis has just complicated its decision. Now, some experts predict that China probably would allow the yuan to rise against the dollar later this year.

Some Chinese companies are already running into difficulty because of the euro's fall against the renminbi.

"We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins," said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, Guangdong Province, which makes gas stoves, heaters and water heaters.

The euro's difficulties have also inflicted tens of billions of dollars in losses on the value of China's US$2.4 trillion worth in foreign exchange reserves, analysts say.

China had been trying to limit its dependence on U.S. Treasury securities for those reserves in recent years, fearing that the United States might someday suffer from budget problems or inflation, and did so by expanding its holdings of European government bonds. Now as the euro tumbles, so does China's reserve value.

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