Euro crisis impacts China and beyond

The turmoil in Europe is intensifying the deceleration of the economies of China and emerging markets which were already grappling with an economic slowdown.

Chee Yoke Heong

THE June election results in Greece may have given the world a reprieve but the crisis in the eurozone is far from over.

This appears to be the view of China's policymakers and the members of its business community.

'The European sovereign debt crisis won't end in the short term, though the winning Greek party now supports the bailout plan. Countries in the eurozone directly beset by the crisis are likely to suffer weak economic growth in the next decade,' said Wang Haifeng, director of international economics at the Institute for International Economic Research in China, in a China Daily report dated 19 June.

While the new government is open to continued bailouts and implementing austerity measures, 'the possibility of a Greek exit has not yet been eliminated as the crisis may deepen in the next two or three years' with the possibility that other countries may also potentially quit the eurozone, thus putting the global economy at risk, adds Wang.

A senior researcher at the Institute of World Economics and Politics, Chinese Academy of Social Sciences, Song Hong, concurred, saying that while the election results 'soothed the anxiety and panic of investors and the public… it's impossible that the debt crisis will come to an end in the short term'. He was cited in the China Daily report as saying that austerity measures will not solve the debt problem and what is required is economic growth.

China, the world's second largest economy, has much to be worried about over the European sovereign debt crisis, given that about one-fifth of its exports goes to Europe. It has already felt the impact from the European crisis, having posted a decline of 2% for the first four months of 2012 compared to the same period a year ago.

Meanwhile, foreign direct investment from Europe fell 27.9% in the same reporting period due largely to the European debt crisis. A survey by the European Chamber of Commerce found that about 22% of European companies in China are considering moving their investments out of the country, according to another China Daily report of 15 June.

The turmoil in Europe is expected to impact the broader slowdown in China, where growth is expected to taper off at about 8% this year compared to recent years' growth of around 10%.

While the European crisis has hit China through international trade and investment, the immediate impact on Chinese banking was limited as Chinese bank exposure to European sovereign debt was limited. But prolonged depressed growth in Europe would affect the Chinese economy (i.e., reduced exports) and that will affect banks, said Banny Lam, Associate Director and economist at CCBI Securities, in a comment dated 29 May. 

However, some believe China would be spared a severe beating from the European debt crisis given that the country has been reducing its dependence on external demand.

Chinese economist Li Daokui said that the eurozone debt crisis will have a limited short-term effect on China, pointing out that the trade surplus fell to 2% of GDP in 2011 from about 8% in 2007. It may fall to about 1% in 2012 and subsequently turn to zero in the coming years, he was quoted as saying in a China Daily report of 11 January.

This view was similarly shared by Jing Ulrich, JPMorgan's managing director and chairman of Global Markets, China, who said that a breakdown of China's quarterly growth showed domestic consumption had taken over as the main driver of the economy, contributing roughly three-fourths of the 8.1% growth in the first quarter of this year.

This showed China had reduced its reliance on exports for its economic growth, Ulrich told Xinhua news agency on 13 June.

'Even if the eurozone does not recover in future years, China will not feel the chill as it had before,' she said.

But export-oriented companies will be badly affected and many may have to lay off employees or shut down, warned Zhang Xiaoji, senior researcher at the economic relations department of the Development Research Center of the State Council, in the China Daily of 29 May.

And that has already happened. Last year saw a wave of labour unrest in factories across Guangdong province, the country's manufacturing heartland, as thousands of workers protested over the loss of their jobs, pay cuts or non-payment of salaries.

Though the strikes were triggered by specific grievances, they were broadly linked to the slowdown in the world economy, specifically the ongoing crisis in Europe which caused deep cuts in exports. As overseas orders shrank, many small and medium-sized companies, unable to survive, had to close down or downsized.

'The euro debt crisis and the slow recovery of the US economy caused the strikes,' Lin Yanling of the China Institute of Industrial Relations told the Washington Post in a report dated 27 November 2011.

'Right now, this is just the beginning,' she said. 'More labour unrest and bankruptcies of small factories in coastal areas of China are inevitable if the world economic crisis doesn't end soon.'

At the time of writing, China has announced that its growth rate for the second quarter was 7.6%, down from 8.1% in the previous three months. This was the lowest rate since the 2008 global financial crisis and the country's sixth straight quarterly slowdown. While this slowdown was due mainly to internal measures taken to cool down an overheated property sector, there can be little doubt that the European crisis played a contributory role.

Responding to this situation, Premier Wen Jiabao has warned that China's job situation will become more 'severe' and 'complex'. The Bloomberg news agency report which quoted Wen also noted that the Federation of Hong Kong Industries warned that more than 2,000 Hong Kong-owned factories in China's Pearl River Delta may close down this year as a result of a fall in export orders and wage rises.

Elsewhere in Asia, countries such as India and South Korea are not spared. India's growth in the first three months of 2012 was at its slowest pace for nine years, at 5.3% compared to the same quarter a year ago, a far cry from the 8% growth of recent years, the Wall Street Journal (WSJ) said on 31 May. South Korea said its exports unexpectedly contracted for a third consecutive month in May compared to a year ago.  

The WSJ report also pointed out that what happens in China will also have broad effects on the rest of Asia, if not the world. For instance, China is a major export destination for commodity producers such as Indonesia, Malaysia and India. And the growing middle class in China is increasingly an important market for Japanese cars and luxury goods. Many large Asian companies also have invested in the Chinese markets, which are expected to grow at a slower pace.  

At company level, Asian corporations are already feeling the heat from the eurozone crisis. Taipei-based Compal Electronics, the world's second largest contract maker of laptop computers, has become more conservative. 'Compared to three months ago we're not as optimistic toward the second half because market conditions are not as strong,' Chairman Rock Hsu was quoted as saying in a Bloomberg report of 26 June. 'We didn't originally expect any growth from Europe, yet we're now worried that conditions there will flow through to impact Asia,' he adds.                      

Chee Yoke Heong is a researcher with the Third World Network.

*Third World Resurgence No. 261, May 2012, pp 28-29