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Greece bailout may affect China

May 11, 2010 15:42 IST

The nearly one trillion dollar EU-IMF package to bail-out Greece from its sovereign debt crisis may impact China, as it would limit options for Beijing to diversify its overseas financial portfolio and may even affect its exports.

China has spent the bulk of its over two trillion dollars of foreign exchange reserves in dollar-denominated assets, such as US treasury bonds.

It has been pondering diversifying the structure of investment from dollar bonds to that in Euro currency.

"But now it is clear that the euro also has risks," Yu Yongding, head of the China Society of World Economics said.

"It would complicate China's policy making. The Greek crisis fully exposed the weakness of the global economic recovery," Yu, who is also a former member of the central bank's monetary policy committee, told China Daily.

"It is hard to predict what will happen next. The euro will probably remain weak, while the dollar will strengthen," he said.

China's exports are set to suffer, Yu said, since the crisis would be a drag on Europe's growth, China's largest trade partner.

"Growth is no longer the top priority for crisis-hit countries; they have to first repay their debt and convince investors they are capable of doing that," he said.

The impact on China's exports, however, could be limited, said Zhang Xiaoji, senior economist with the State Council's Development Research Center.

"A weakened euro will affect trade settled in euros, but the majority of China's trade with European countries is settled in US dollars he said, adding that China's previously announced export target of 10 per cent year-on-year growth for this year should not necessarily be changed," he said.

One outcome of the European crisis is that China is facing less pressure for the yuan's revaluation as the US dollar is rising. But the dollar's rise could damage US exports, which US President Barack Obama wants to double in five years, he said.

"Therefore, the US could press harder for the yuan's appreciation to benefit its export sector," Yu said.

China will "improve the yuan's exchange-rate formation mechanism," but the yuan would remain "basically stable", the People's Bank of China said in a quarterly report on Monday.

Yu also said China's current monetary policy, which is tightening, should not be changed despite the external uncertainties brought about by the European crisis.

"We should not rush to change it given the excessive money supply growth and high asset prices," he said.

China International Capital Corporation cut its forecast of China's year-on-year growth for this year to 9. 5 per cent from 10.5 per cent in its report released on Monday, citing the country's tightening measures and external uncertainties caused by the Greek crisis.

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