China on alert for possible Greek eurozone exit

BEIJING - China must take precautions against a possible exit by debt-ridden Greece from the eurozone, as an exit could cause turbulence in global financial markets and hurt exports and growth, government economists and analysts have warned.

Measures they have suggested to counter the crisis include adjusting asset holdings in the eurozone, boosting domestic demand, promoting structural reforms and hedging exchange losses, as well as maintaining a stable currency.

The world's second-largest economy might see its year-on-year growth dip below 7 percent if Greece leaves the eurozone under current circumstances, according to Ba Shusong, an economist with the Development Research Center of the State Council, or China's cabinet.

"That scenario and its impact on employment would be undesirable for the Chinese government," Ba said.

His comments come ahead of national election polls conducted in Greece on Sunday, with global investors fearing that a left-wing coalition government will emerge from the election and tear down the bailout deals that have kept Greece afloat since 2010, leading to default and an exit from the eurozone.

Financial turbulence in Europe was a major driver in China's economic downshift early this year, as it reduced external demand markedly, Ba said, adding that a Greek exit from the eurozone will make the situation worse.

He urged authorities to follow developments in Europe closely and adjust economic policies in line with the changes.

China should reduce its holdings of assets in the eurozone's peripheral countries if Greece moves toward an exit, Ba suggested.

To offset external impact with domestic demand, the government must continue to maintain investment growth, carry out structural tax reduction and boost the role of private capital, he added.

There is a strong possibility that Greece will drop out of the eurozone in the future if economic turmoil continues in the region, although it is unlikely that it will happen immediately, Ba estimated.

The economist noted that if Greece stays in the eurozone, China's exports will pick up after bottoming in the second quarter of 2012 and there should not be any massive fiscal stimulus like the 4-trillion-yuan ($634 billion) investment plan rolled out in late 2008 to counter the global financial crisis.

Xiang Songzuo, deputy head of the International Monetary Institute at Renmin University, said Greece is unlikely to withdraw from the eurozone at present and will return to talks with the EU, no matter which party gains power in the election.

Xiang said the government should take measures to maintain financial stability, especially the stability of the Chinese currency, adding that China's current policies to support growth are already the best response to the eurozone crisis.

China's economy expanded at its slowest rate in nearly three years in the first quarter of 2012, growing 8.1 percent year on year, as the European sovereign debt crisis diminished export orders and a subdued property sector cooled investment.

Export and industrial output growth rebounded slightly in May from lower-than-expected levels in April, but fixed-asset investment and retail sales have continued to slow, according to official data.

To buoy the slowing economy, China announced its first interest rate cut in more than three years last week. It has also fast-tracked some investment projects, opened the way for private capital to enter state-dominated industries and provided subsidies for purchases of energy-saving home appliances.

Economic troubles are likely to continue to plague Greece, which will weaken China's exports gradually, said Yao Wei, China economist at Societe Generale.

China's monthly import and export growth will likely stay in the single-digits from now until the third quarter, he forecast.

However, Xiang said he believes there is no need to worry too much about the impact, as China's major trading partner in the eurozone is Germany, whose economy remains resilient.

Exporters have been advised to prepare for fluctuations in the euro's value against the yuan, which will incur greater risks of exchange losses.

The euro is expected to continue depreciating against the yuan in the near future and Chinese firms can use forward foreign exchange contracts and other financial derivatives to hedge exchange risks, said Ye Yaoting, a foreign exchange analyst with the Bank of Communications.

Companies should change euros into US dollars or yuan and receive future payments in non-euro currencies as much as possible, advised Wan Chao, an investment manager at Ping An Asset Management Co., Ltd..

The EU is China's largest trading partner. Its trade with China edged up 1.3 percent year on year in the first five months of 2012, compared to the 7.7-percent growth of the country's total foreign trade.

Meanwhile, Chinese banks have been scaling back financial derivative trading with European banks to reduce exposure to risks.

The Bank of China, China's third-largest lender, suspended purchases of derivatives, such as credit default swaps, from French banks Societe Generale and Credit Agricole at the end of 2011.

The Industrial and Commercial Bank of China and the Bank of Communications have also reduced investment product transactions with Societe General, Credit Agricole and French lender BNP Paribas, according to the banks' reports.

Although China's financial sector has very limited exposure to sovereign and bank asset risks in the eurozone, massive capital outflow from risky markets will affect China if Greece breaks away from the eurozone, Yu Yongding, a former central bank advisor, was reported as saying in late May.

China's central bank and other departments should consider measures, including capital controls, capital market suspension and contingency fund injections, to counter the impact of a possible Greek withdrawal, Yu proposed.