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Economic reform stumbles on EU debt woes

(Xinhua)

14:08, June 20, 2012

BEIJING, June 20 (Xinhua) -- Analysts have warned that, despite the much-trumpeted economic implications of the weekend's Greek election, the lingering European debt crisis still makes daunting reform in China even harder.

Aware of the flaws embedded in its systems, the world's second-largest economy has moved to slow its growth to focus more on economic restructuring and a shift in its growth mode.

However, external jitters, especially increasing uncertainties in Europe, have made growth a priority again in China, after its first-quarter gross domestic product (GDP) growth hit a near-three-year low of 8.1 percent.

A worsening eurozone debt crisis could put fresh pressure on China's trade, macroeconomic policy, investment and foreign reserve policy, and eventually force the Asian nation to delay its restructuring effort, according to analysts.

The region's troubles remained far from resolved even after the slim triumph of Greece's pro-bailout New Democracy party in the election, which has temporarily eased concerns over a Greek exit from the eurozone.

Although the conservative party stands a good chance of forming a new government, the pro-euro government may soon prove vulnerable in pushing further austerity at home to seek a further bailout, some analysts believe.

Wang Xiaoguang, a researcher from the Chinese Academy of Governance, an advisory body to the central government, said the region will undergo chronic economic pain under the dim outlook.

Given the region's weak demand, bilateral trade between China and the EU will be hurt the most, said Zheng Liansheng, a researcher with the Financial Research Center of the Chinese Academy of Social Sciences.

The EU, China's largest trade partner for the past eight years, saw trade with China up only 1.3 percent in the first five months of 2012, compared with an increase of 18.3 percent year on year to $567.21 billion in 2011.

JP Morgan estimated that each percentage growth drop in the eurozone will drag down the Chinese economy by 0.3 percentage point.

Meanwhile, a sluggish external market will cause an investment halt in China's vital manufacturing sector, which accounts for a quarter of China's all investment.

"At present, the trend of de-leveraging in European economies is more obvious, and the region's demand is much weaker. The situation can hardly get better in the short run," according to Zheng.

Aside from endangering the safety of China's large foreign reserves, the debt woes will also drive investors from RMB assets to safe-haven assets in the US dollar, he added.

Lian Ping, chief economist with the Bank of Communications, said China's self-initiated growth control, coupled with external chaos, has led to concerns over risks of sharp drops.

In recent years, the Chinese government has stepped up stimulus policies in consumption and investment sectors to boost the contribution of the internal market to its GDP.

The effort has worked as the ratio of trade surplus in GDP dropped to 0.05 percent in the first quarter of 2012 from 7 percent in 2007.

But the government's policy-making has nevertheless become complicated, after its domestic market proved too stubborn to fill into the hole left by external demand.

Wang said residential consumption has not been able to grow fast enough to negate economic effects from abroad in the short time due to lagging income distribution and social security systems. Meanwhile, on the investment side, an over-aggressive stimulus package like the one issued during the 2008 crisis would only cause economic ups and downs.

"China's restructuring comes with risks, and requires sophisticated handling of both the domestic and external situations," Zheng explained.

"The debt crisis has put China on alert for external risks, which will postpone its efforts to substantially advance its restructuring."

To buoy the slowing economy, the government has sped up approvals for infrastructure projects and slashed interest rates after a State Council executive meeting in May shifted the focus to a pro-growth stance.

"If the outside factors were not so negative, the country would not jump on those new stimulus measures," Lian said.

He believes the country should not turn back, holding onto its inner-focused restructuring cause, and pushing reforms to increase residential spending and spur consumption.

Bad as it is, the eurozone debt crisis could also serve as a driver for China's restructuring efforts, and a chance for Chinese firms to expand, some have noted.

"With a slack overseas demand, some Chinese firms have begun to push innovation and technological progress, promote industrial upgrading and reduce resource input," Lian said.

While preparing for financial risks from the possible Greek exit, China should encourage sovereign wealth funds, outbound investors and Chinese enterprises to invest in distressed euro assets, Zheng suggested.

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