Debt Contagion

By MEI XINYU

Debt Contagion

By MEI XINYU

The European debt crisis will not badly hit China’s economy

Despite Europe’s economic woes, China faces no real risks from the sovereign debt crisis. China’s flourishing domestic market has offset part of Chinese exporters’ losses. Also, European companies may ramp up their investment in China because of sluggish demand back home. All this will help alleviate the impact of Europe’s crisis on Sino-EU business ties.

Bilateral trade

China’s trade with crisis-ridden European nations is only a small proportion of its total foreign trade.

In 2009, China’s export volume was about $1.2 trillion. Its export volume to the EU was $236.28 billion. And its exports to PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) were $41.68 billion, which accounted for 3.47 percent of China’s total exports and 17.64 percent of China’s exports to the EU.

In 2010, China’s export volume was $1.58 trillion. Its exports to the EU were $311.24 billion. It exported $57.78 billion to PIIGS countries, 18.6 percent of its exports to the EU, and 3.7 percent of its total export volume.

As long as big EU economies like Italy, Germany, France and Britain don’t collapse, the sovereign debt crisis will not greatly decrease the EU’s demand for Chinese exports. Besides, the crisis will not affect re-exportation in countries such as Greece and Italy and tourist consumption in Spain and Portugal.

Demand in non-crisis countries, which have allocated funds to rescue their partners in trouble, may also drop. But as long as these nations keep themselves out of crisis, their demand will not decrease too much.

Moreover, there are other elements that will help China avoid being devastated by the euro zone sovereign debt crisis.

China’s huge domestic market can compensate possible losses. In recent years, the ratio of China’s domestic retail sales of consumer goods to exports has been on the rise. In 2009, retail sales of consumer goods in China reached 12.53 trillion yuan ($1.97 trillion), 1.28 times its exports that year. In 2010, the number increased 14.8 percent over 2009 when allowing for price rises, reaching 15.7 trillion yuan ($2.47 trillion).

In China, many companies producing export products can easily turn to differentkinds of products for the domestic market, changing their manufacturing orientation quickly to ft enlarged domestic demand. In this way, many companies have successfully avoided external impacts by exploring the domestic market.

Euro depreciation

Risks posed by euro depreciation are reflected by shrinking external assets, especially foreign exchange reserves, and a decreased export income for Chinese exporters.

Euro depreciation will diminish the value of China’s euro reserves. But losses become real only if the currency is exchanged. Considering the large scale of its foreign exchange reserves, China cannot possibly sell its euro-denominated assets. Instead, it will simply wait and hope for better conditions in the future.

For export enterprises that settle accounts with the euro, euro depreciation will reduce their export income. But euro zone nations do not usually settle their external trade in euros. In fact, euro settlement happens often between euro zone nations and their neighbors, or countries that have established arrangements with the EU and its member states, especially former colonies of euro zone nations. Therefore, euro zone nations prefer to settle their imports from China in U.S. dollars rather than euros. Statistics from China also show that 80 percent of China’s foreign trade during the past years has been settled in U.S. dollars, including its exports to the euro zone. Meanwhile, euro depreciation will improve euro zone nations’ export competitiveness. Exports from Germany and the Netherlands will benefit the most. Tourist industries of Italy, Spain and Portugal will share the benefts. Countries that peg their currencies to the euro will also show stronger competitiveness. Some countries outside the euro zone might choose competitive devaluation to encourage their exports, trying to boost their economies by taking a beggarmy-neighbor policy.

Currently, about 40 countries target the euro as the anchor of their currency systems, or include the euro in their basket of pegging currencies. Including overseas territories of France and mini European states like the Vatican and Andorra, there are more than 50 nations or regions whose currency systems are connected with the euro. Countries or regions that include the euro in their currency systems are mostly neighbors of EU members, or countries with arrangements with the EU or its members. Fortunately, there is not much competition between China’s export industries and the export industries of these countries. The competitive devaluation therefore will not take a heavy toll on Chinese exporters.

Two-way investment

The crisis has created a dual infuence as China absorbs direct investment form European countries. On the one hand, European investors might withdraw funds after their parent companies sink into crisis. On the other hand, other investors might enlarge investment in China to cash in on China’s growing market when their countries’ markets shrink. Judging from the current situation, the latter infuence is greater.

The influences on Chinese investors in Europe are similar. The crisis could cause losses to Chinese enterprises in Europe, which may drag down their parent companies at home. As Chinese enterprises in Europe usually are of a small scale, the crisis in the euro zone is unlikely to infect companies at home and cause a domino effect. Chinese businesspeople in Europe, however, might suffer heavy blows. The Chinese Government should pay attention to them and help them to survive. The crisis will also provide opportunities for Chinese enterprises to make investments in Europe and increase their export profts. European governments’attitudes toward Chinese investors will become more welcoming.

Social impact

The crisis exposed the EU’s inability to take quick action to address problems. This disunity, coupled with unemployment and its aging population, will lead to a decline in Europe’s international status in the long term.

European governments must pay great attention to unemployment. Unemployment in the EU has been more serious than in the United States. The problem became worse after the outbreak of the global financial crisis in 2008. Unemployment in the euro zone reached 9.2 percent in April 2009, with 14.6 million people jobless, the highest since September 1999. In April 2009, the unemployment rate of 27 EU states was 8.6 percent, which means over 20 million couldn’t find jobs. The situation deteriorated in 2011. According to statistics from Germany and the European Commission, the average unemployment rate for the 15 to 24 age group in 27 EU countries is 20.5 percent. More than 5 million youth cannot fnd jobs. In Greece, Spain, Portugal, Ireland and Italy, the unemployment rates have respectively reached 38.5 percent, 47 percent, 27 percent, 27 percent and 28 percent. Even in Germany unemployment has hit 9.1 percent.

ZHAO WANWEI

Moreover, EU countries are cutting government budgets to cope with the sovereign debt crisis, which will increase unemployment as government workers lose their jobs. Europe needs to show great capability to step out of the dilemma. But what Europe lacks is the capability to act.

While causing the unemployment of young people, the crisis has had a profound impact on European society. During the past two years, protests and demonstrations have occurred around Europe. Riots broke out in British cities including London, which highlighted the social consequences of the crisis. The unemployed youth also include people with good educational backgrounds. The higher their education costs, the higher their career expectations are. So when they become jobless, their anger and frustration are stronger. Education also enables them to better utilize social media to spread their messages. Some European nations have extended the retirement age to deal with the aging problem, making it more difficult for young people to get ahead.

The author is an associate research fellow with the Chinese Academy of International Trade and Economic Cooperation