Debt contagion
- By Mei Xinyu
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Beijing Review, December 13, 2011
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 different kinds of products for the domestic market, changing their manufacturing orientation quickly to fit 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 benefits. 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 beggar-my-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 influence 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 influence is greater.
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