After already downgrading growth expectations, China could suffer if the European economy tanks.
HONG KONG—Europe’s festering debt crisis is adding to strains on China, just as the country is pricking its property bubble and facing a manufacturing downturn.
Leaders in Europe are navigating a crucial week as they work to find a breakthrough at a summit Friday to avoid the disintegration of the euro and the global financial panic that would ensue.
In such a scenario, China’s growth would be slammed by lower demand for its exports.
It would also prompt Beijing to slow the rise of its currency to a crawl—exacerbating trade tensions with the U.S. and other nations accusing China of currency manipulation.
Even if the euro—common currency shared by 17 nations—remains intact China and other Asian countries will face the prospect of a recession in Europe next year and anemic growth in the U.S.
During the 2009 global recession, China’s ‘shock and awe’ stimulus kept its booming economy on track. For Asia and other parts of the world, it softened the impact of the economic upheaval.
The stimulus also high inflation shyrocketing, creating a flood of low-quality bank lending and uninhibited partying in the property market. Beijing is still trying to contain those distortions, restraining any potential response to a new downturn.
Chinese factory production shrank in November for the first time in nearly three years and labour unrest is increasing as employers cut staff.
Chinese exporters say orders have dropped by 10 to 30 per cent because of slumping demand in Europe and the U.S., according to Stanley Lau, deputy chairman of the Hong Kong Federation of Industries.
Factories are getting smaller orders and customers are placing them as late as possible to ensure the product will sell, he said.
In a sign of what might lay ahead, China’s exports to troubled Italy tumbled 17 per cent in October from a year earlier. Sales to the full 27-nation European Union rose seven per cent, buoyed by strength in Germany and France, according to customs data.
That could drive down China’s economic growth rate from this year’s forecast of above nine per cent to as low as six per cent. The Asian Development Bank has already trimmed its forecast for Chinese growth next year to 8.8 per cent from 9.1 per cent.
But in a worst-case scenario, with both Europe and the U.S. contracting at levels similar to 2009, it expects Chinese growth to slow to 6.8 per cent.
Others think the hit could be much smaller because China’s economy is less dependent on exports than it was before the 2008 global financial crisis.
Exports now make up about a quarter of China’s gross domestic product, down from about 40 per cent in 2007 as investment and domestic consumption rose.
But millions of jobs still depend on manufacturing, especially along the southeast coast where thousands of factories supply Europe and the U.S. with low-cost shoes, toys, furniture and other goods.