According to Nicholas Hastings at Dow Jones, “while the euro zone fiddles, China is starting to burn”. That may be a little bit of an exaggeration but not much. And he goes on..

 “There is now evidence that the euro zone debt crisis is not only spreading to banks, by undermining their ability to fund themselves, but to the major trading partners with the region.

In this case, that is China. And what is bad for China is definitely bad for the global economy. In fact, news of a slowdown in China will probably eclipse any of the good news coming out of the U.S.

U.S. growth may finally be picking up, but given that the economy is so closed, the positive impact on the global economy will take longer to feed through.

In the same vein, any negative impact on the U.S. economy from the euro zone crisis may be slower in showing through, even though U.S. banks could soon start to face funding pressure because of their exposure.

But, as recent data has been showing, the euro zone crisis is starting to have a fallout in China.

Analysts are forecasting that growth, which was soaring at a rate of more than 10% not so long ago, will soon be down under 9% in the next few months.
With export growth slowing and with the country’s trade surplus likely to continue falling, the People’s Bank of China monetary policy committee member Li Dakoui has already warned that the surplus may fall to zero in two years.

This certainly helps to explain the PBOC’s reluctance to allow the yuan to continue rising at the same pace as it did earlier this year.

The PBOC will certainly try to keep Chinese exports competitive for as long as it can, especially given fears that the country’s housing bubble could burst.

The latest figures, which came alongside sharp falls in business conditions and new orders, show that house prices declined in 33 out of 70 cities. This was the worst performance this year.

Not only will a slowdown in yuan appreciation increase tensions with the U.S., which has been demanding less currency manipulation by Beijing, but it will likely reduce risk appetite in global investment markets.

The likely retreat that will take place into safe havens should play into the hands of both the dollar as well as the yen but will leave commodity currencies, including the Australian dollar, suffering as the outlook for global demand is downgraded.”
Our comment: China might soon need to dig into its $3.2 trillion in reserves to save its economy from crashing. The problem is, according to China Daily, that China’s armory has only about US$100 billion to spare since most of its money is fully invested … and the unwinding of those positions will cause a vicious circle of negative sentiment. Sorry Europe… China’s pockets are not going to save you.
Sources: WSJ, China Daily
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