What should China do if Greek exit euro?

Lian Ping

Chief economist of the Bank of Communications

What will be the implications for China if Greece leaves the eurozone?

There is little chance that Greece will leave the eurozone. If it were ever to happen, China would be vulnerable to such a situation. China's exports to Europe would decline further in the short term. Other countries such as the United States, Japan and emerging economies would also be affected, causing China's exports to those countries to decline.

A Greek exit from the eurozone would greatly affect China's international payments and capital flow. There would be large-scale capital outflows from China's property and stock markets, because European countries are attracting global capital to return in order to deal with debt risk and because the risk appetite would fall globally. The short-term outflow of capital would depreciate the yuan, leading to domestic monetary tightening and drive up costs in the private sector.

There would certainly be a major impact on Chinese financial institutions located in Europe, which mainly conduct bond business, within two to three quarters.

Will China be able to handle the economic fallout without Greece?

A Greek exit from the eurozone would definitely increase the slowdown pressure on Chinese economic growth. The Greek economy would suffer greatly. At the same time, a global financial crisis would occur due to severe market turmoil. China would inevitably be involved in such a crisis. A downturn in China's foreign trade and capital outflows would lead to a decline in private sector investment. Furthermore, the loss of capital and yuan depreciation as well as reduced market confidence would bring about economic decline in China.

If Europe becomes less important as an import and export market, where else can China look?

It's difficult for China to find another import and export market as large as Europe in the short term. Europe is now overtaking the United States as China's biggest foreign trade market. Although trade volumes between China and the emerging economies such as Russia, India and South America are surging, their markets remain relatively small.

What other policies can China implement to lessen the impact of economic decline in Europe?

To mitigate the impact of economic decline in Europe, China should diversify its export channels, in order to stabilize export volume and expand domestic demand to reduce its reliance on exports and investment. Policies supporting small and medium-sized enterprises should be launched as soon as possible, because they are the major drivers of domestic demand and job creation. China should boost support for science and technology including encouraging companies to carry out technological upgrading and innovation. Financial policy reform and currency policy reform should be further deepened. The social security system needs to be improved to prevent jobless people from falling into poverty.

Most importantly, an emergency plan to cope with a severe crisis must be drawn up to reduce the risks brought about by unexpected changes in the global economic situation.