China paper warns of impact from euro crisis "Black Death"

BEIJING Mon Aug 22, 2011 6:15am EDT

BEIJING (Reuters) - The "Black Death" of debt crisis across the euro zone will hurt China by sapping demand for exports, although Beijing's relatively small holdings of euro assets will limit any damage to foreign exchange reserves, the nation's top official newspaper said on Monday.

The bleak diagnosis for the euro's prospects appeared in the overseas edition of the People's Daily, the top newspaper of China's ruling Communist Party, in a commentary by a former central bank official and an economist for the state-owned China Development Bank.

The commentary in the People's Daily does not reflect a definitive view from China's top leaders, but it suggests the euro zone's successive crises have stirred anxiety and debate in Beijing about the impact on China.

"The euro debt crisis has now been going for nearly two years since the end of 2009, and the sovereign debt crisis has spread like the Black Death of the fourteenth century across the euro zone countries," said the commentary, referring to the rodent-borne pandemic that devastated Europe.

The commentary came days before French President Nicolas Sarkozy is due to meet Chinese President Hu Jintao in Beijing for impromptu talks that will probably focus on the recent turbulence in global financial markets.

"The spread of the euro debt crisis will not have as large an impact on our country's foreign exchange reserves as the U.S. sovereign debt downgrade, because euro assets make up far less of our country's foreign exchange reserves than the dollar," added the authors, Zhang Zhixiang, a former head of the People's Bank of China international department, and Zhang Chao, an economist for the China Development Bank.

"But the euro debt crisis will lead to a decline in real demand that will have a far-reaching impact on our country's real economy," they wrote.

About a quarter of China's record foreign currency reserves of more than $3 trillion are held in euro assets, analysts estimate.

RESTORE CONFIDENCE

It was not clear, however, that the commentary signaled China would take a tougher stance in discussions during Sarkozy's visit.

Wang He, a researcher with a Chinese government think tank, said Sarkozy and Hu have a shared interest in portraying Europe's troubles as manageable.

"Neither leader will miss the opportunity to voice their joint commitment to stabilizing global markets, and that should help to restore investment confidence to some extent," said Wang, who studies European economics at the Chinese Academy of Social Sciences.

He also played down the likelihood of Europe's crisis spinning out of control.

"I don't expect Europe to solve its debt problem overnight, but we must see that Europe has the financial capability to prevent it from spreading like a disease," he said.

"It is certainly overly pessimistic to say that the euro zone is falling apart."

The 27-member EU bloc is China's biggest trade partner, with bilateral trade in goods in 2010 reaching 395 billion euros ($570 billion), a rise of 13.9 percent, according to EU statistics. Chinese exports to the EU reached 281.9 billion euros in 2010, a rise of 18.9 percent on 2009.

Chinese leaders, including Prime Minister Wen Jiabao, have repeatedly expressed confidence that debt-laden European countries can overcome their problems and return to healthy growth.

During a visit to Germany in June, Wen said his country could buy the sovereign debt of some troubled euro zone nations if needed.

But the People's Daily said the euro zone's problems reflected deep-seated institutional failings that needed to be overcome for Europe to recover confidence and strong growth.

"The euro zone should reform the institutional constraints to economic development, and show a responsible attitude regarding the links between their countries' and their region's economic development and global economic and financial stability," wrote the two economists.

($1 = 0.694 Euros)

(Reporting by Chris Buckley and Zhou Xin; Editing by Ken Wills and Daniel Magnowski)

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Comments (2)
paulos wrote:
It is the financial black hole that exists within southern Europe that I fear and the lack of any leadership to deal with it. They need to accept that the Euro is unworkable in its present form, expel some members or create a ‘southern Euro zone’ as distinct from the core and then concentrate on getting the core right. There really is a head in the sand attitude to this and a refusal to accept what everyone can clearly see. The political hubris goes on and no one believes it – not even the Euro zone public like myself.

Aug 22, 2011 1:20pm EDT  --  Report as abuse
breezinthru wrote:
Chinese President Hu Jintao knows perfectly well the purpose behind French President Nicolas Sarkozy’z sojourn to Beijing at this particular moment.

Sarkozy will ask for loans and/or guarantees. China seems to recognize that the scope of the problem is far greater than anything they can cover due to the monstrous size of the debts, the disconnect between the ECB and each European nation’s governments and their banking systems and the simple fact that the Eurozone was conceived so weak economies could pull down on on the value of the Euro.

The Eurozone was not conceived to increase the quality of those weaker economies. It needs those weak economies to remain weak in order to prevent the Euro currency from becoming too strong.

Only a fool would invest in those weak economies at this point; they are drowning in debt… and the Chinese are not fools. Why would the Chinese toss their money into the European abyss? They are not likely to be repaid according to the terms of any agreement they could make with the Europeans and they know it. It’s mathematically impossible.

Aug 24, 2011 11:02pm EDT  --  Report as abuse
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