China on alert for possible Grexit

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.