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China 'should prepare' on euro

(China Daily)

14:04, May 25, 2012

Although there is only "a slight" chance that Greece will leave the eurozone, China should take steps to guard against the possible effects of this worst-case scenario, experts said.

After the yuan's exchange rate plunged below 8 per euro on Wednesday, it reached 7.97 against the euro on Thursday, the strongest level since June 2002.

Analysts said political conflicts over austerity and growth options and deepening uncertainties in Greece may continue to weaken the euro, making the yuan relatively stronger.

At a gathering on Thursday, European leaders urged Greek politicians and citizens to choose to stay within the eurozone while respecting their commitments to austerity.

Duncan Freeman, research fellow at the Brussels Institute of Contemporary China Studies, said the euro will remain fragile until there is a real resolution of the crisis, not only in Greece, but also more broadly in the eurozone.

"There is no sign that this will happen anytime soon," said Freeman.

Freeman said some Greeks are sending signals to the rest of the eurozone that a Greek exit will be a disaster for the region.

Meanwhile, there are politicians in other eurozone countries saying that an exit will be a disaster for Greece but the euro will survive and the contagion will be limited.

"Each side is trying to scare the other into doing what it wants," said Freeman.

Freeman's comments were echoed by Chinese analysts.

"If the European countries are really making plans for Greece's exit, they should do it quietly in private, not through public discussion," said Liu Mingli, a researcher with the Institute of European Studies at the China Institute of Contemporary International Relations.

"It was like the debate over raising the US debt ceiling last year. A final agreement will be reached at the last minute, but each party is trying to get as much interest in the game before the final moment approaches," Liu said.

However, "although the possibility (of a Greek exit) is trivial, it is not zero, and the result (of Greece's exit) will not be small," he said.

Peng Wensheng, chief economist at China International Capital Co, said global GDP growth may tumble to only half of what it was during the 2009 global crisis, resulting in China's growth rate slowing to 6.5 percent, not taking into consideration policy adjustments.

"If China were to make its own plans, it should lessen its exposure to euro assets in the short term, which are likely to depreciate as there will be capital outflows from the eurozone on a large scale following Greece's exit," Liu said.

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