European Sovereign Debt Crisis’s Influence and Enlightenment on China

摘要：對中國的歐洲主權債務危機從形成到逐步影響中國的各個方面進行詳盡分析和探討，包括對匯率、對外貿易、金融政策等的影響，指出應以歐洲主權債務危機為戒，改進中國地方政府債務的監管體制。Abstract: This paper analyzes and discusses in detail various aspects concerning the European sovereign debt crisis， ranging from its coming into being to its influence on China， including its impact on the exchange rate， foreign trade and financial policies. Then it points out that China should learn lessons from the European sovereign debt crisis and improve regulatory regime of local government debt.關鍵字：主權債務危機；人民幣匯率；對外貿易；金融政策；產業結構調整；地方債務Keywords: sovereign debt crisis; RMB exchange rate; foreign trade; financial policies; industrial restructuring; local debtIntroductionIn 2010， the European sovereign debt crisis triggered by Greek and other countries began to affect China’s economy through exchange rate， foreign trade and financial policy when people thought that China’s economy was recovering speedily from the financial crisis and started to consider proper ways to adopt “exit mechanism”. What’s more， its impact was expanding continually， and for a time， “double dip” economic expectation again became the topic of the day. We need to meditate deeply to figure out European sovereign debt crisis’s impact on China and lessons we can learn from it.1. The evolving process of European sovereign debt crisisThe European sovereign debt crisis first broke out in Greece. In order to meet EU deficit rate and join in the euro zone in 2001， Greece had to reduce its foreign currency debt， so it conducted cross-currency swap agreements with Goldman Sachs in 2000 and 2001. These transactions reduced Greece’s foreign currency-denominated debt， making its deficit rate low enough to join in the euro zone in 2001.However， in return， Greece had to pay prices higher than market price to Goldman Sachs in the future for its current benefit. In other words， Greece took on much more future debts in exchange for less debts and lower deficit rate in 2001. This finally triggered debt crisis in 2009 when Greek government was unable to pay these debts.In December 2009， the three largest credit rating companies downgraded Greece’s sovereign rating in a row， which aggravated Greece’s debt crisis. Due to alliance in the European Community， central banks of European Union countries mutually held other EU members’ government bonds， thus the entire EU were troubled by the debt crisis. Since 2010， the sharply depreciating euro combined with the nosedive of European stock market had exposed euro zone to the most severe ordeal in 11 years as of its establishment. It was even rumored that the euro zone may fall apart. At last， the European sovereign debt crisis came to a temporary relief thanks to the stabilization mechanism totaling 750 billion Euros established by EU finance ministers and 250 billion Euros aid fund for Greece provided by the IMF. European sovereign debt crisis relieved the pressure of RMB appreciation.Since the beginning of 2009， with its vigorous economic recovery， China has been leading the way in getting rid of the financial crisis. In the year 2009， China’s GDP growth rate remained at 8.7%. Chinese Government were confronted with unprecedented pressure of RMB appreciation as its trade surplus with the United States and European economies increased continually and unemployment rate in those countries rose rather than decrease. Furthermore， in order to protect its domestic interests， the U.S. government repeatedly threatened to add China into the list of currency manipulators， and to enforce a series of economic sanctions and trade barriers.In addition， the increasing RMB appreciation pressure enforced by the United States and other countries on Chinese government resulted in international financial operators’ confidence in RMB. Consequently， large amounts of hot money flooded into China via underground banks and other channels， leading to a vicious cycle of appreciation expectation， which further aggravated Chinese government’s pressure of RMB appreciation. China has maintained its exchange rate against the U.S. dollar stable， taking a large variety of factors into consideration， including RMB exchange rates’impact on China’s export commodity prices (i.e. the cost of exports) and its possible impact on inflation expectations， etc.At this point， the European sovereign debt crisis originating in Greece broke out， reducing the pressure on RMB appreciation. On the one hand， the European sovereign debt crisis led to continuous decreasing of euro exchange rates， resulting in RMB’s“potential appreciation”. According to statistics from Bank for International Settlement， effective exchange rate of RMB rose from 110.91 in November 2009 to 118.8 in June 2010， which considerably reduced the external pressure of RMB appreciation. On the other hand， affected by its sovereign debt crisis， consumption in the euro zone decreased significantly， which consequently affected its demand for goods and services imported from China， relieving the pressure of RMB appreciation to some degree.2. European sovereign debt crisis brought disaster to China’s foreign tradeRamifications of the ever aggravating European sovereign debt crisis are penetrating into China’s foreign trade sectors step by step through the vein of economic globalization. Especially for export enterprises closely related with Europe in business， their fresh “signs of recovery” in exports died at its infancy. Specifically speaking， the European sovereign debt crisis affected China’s exports through two main channels; one is impact of fluctuation in RMB exchange rate against the Euro， and the other is decreasing export demand resulting from shrinking consumption ability of European countries.(1) Impact on importersTo a certain extent， the European sovereign debt crisis has evolved into a euro crisis. Since 2010， the exchange rate of RMB against euro has accumulatively appreciated by 14.5%， rising from 1 euro for 9.8 yuan to 1 euro for 8.4 yuan. Previously， for fear of appreciation of euro， some importers took certain hedging measures， including purchasing euro positions or conducting currency exchange agreements(RMB against euro) in advance， etc. Importers suffered great loss in foreign exchange earnings as euro significantly depreciated.(2) Impact on exportersCompared to importers’ loss in foreign exchange earnings， exporters suffered much severer loss from the European sovereign debt crisis. Exporters had to face directly the two demanding problems: exchange rate depreciation and export demand decrease.When concluding a deal with euro zone countries， exporters get paid(in euro)， and by exchanging the payment for RMB， their profits would diminish considerably. For example， if an order is of 20 million euros and the previous exchange rate is as high as 1 euro for 13 yuan， then the revenue would be 260 million yuan; but it would be merely 168 million yuan if converted at the current exchange rate， one euro for 8.4 yuan. In this process， losses caused by euro exchange rate depreciation are as high as nearly 100 million yuan. Such a huge foreign exchange loss will significantly affect and hinder export enterprises’ fund recycling and reproduction， causing potential funding cost pressures for China’s exporters.Recently， although the European sovereign debt crisis has received 750 billion euros from the EU and 250 billion euros from the IMF as aiding fund， as its place of origin， Greece has taken many rounds of austerity fiscal policy， mainly including cutting back government spending， and raising certain types of taxes rates， in a view to obtaining the above aiding funds on the one hand and avoiding soaring deficits to survive the sovereign debt crisis on the other.Measures to cut back government spending include freezing government retirement pension plans， cutting down public sector employees’ holiday allowance by 12%， and reducing government employees’ bonus by 30%. In consequence， the government and other public sector employees’ income would be reduced by one month’s amount. In addition， heavier taxation would be levied on luxury goods， tobacco products， spirits and wine， and at the same time value-added tax of enterprises would also be raised from the previous 19% to 21%. No doubt， these austerity fiscal policies considerably reduced consumption ability of Greeks.Data show that the economic aggregate of Greece accounts for 2.5% of that of the euro zone， and that trade volume between China and Greece accounts for about 1% of total trade volume between China and the EU. Greece’s economic aggregate and its trade volume with China are not quite large， but as the overall economy of the EU is harassed by this sovereign debt crisis， undoubtedly citizens’ consumption ability of the EU member countries is impaired greatly. As EU is China’s largest export market， accounting for 16% of China’s trade volume， decreased consumption demand in the EU will affect China’s overall exports.3. European sovereign debt crisis’s impact on China’s financeSince 2010， as China’s economy began to recover gradually， China’s monetary and financial policy has been phasing out. Deposit reserve ratio， the most typical monetary and credit indicator has been raised a number of times in a row. In early 2010， in less than 4 months the central bank raised deposit reserve ratio for three times(January 18 ， February 25 and May 1)， making the reserve ration close to the recorded high ration in mid-2008， which offset part of the excess liquidity of the banking system and controlled the growth rate of monetary aggregates.Meanwhile， since the fourth quarter of 2009， China’s high monetary aggregates have slowed its pace. In the first quarter of 2010， the growth rate of M2 kept slowing down for several months. Consequently， market liquidity began to show signs of tightening: lending rates of financial institutions rose slightly. In the first quarter， lending rates of non-financial enterprises and other sectors gradually rebounded a little. The weighted average lending rate in March is 5.51%， 0.26 percentage points higher than in the beginning of the year. Loans whose interest rates were floating upward accounted for 41.04%， 4.49 percentage points higher than in the beginning of the year. It can be seen that China’s financial policy is exiting step by step.Since May 2011， China’s monetary policy “arrangement” has been significantly affected by the increasingly intensifying European sovereign debt crisis. Struck by the sovereign debt crisis， global economy is likely to sink into the second recession. Chinese government and senior leaders have publicly said they would keep an close eye on the situation and get prepared to deal with “double dip”. Recently， the European sovereign debt crisis began to affect capital liquidity in China’s financial markets. In the face of increasingly tight market liquidity， China’s central bank began to reduce pressure on market capital. The central bank has gradually increased supply of capital on the market. The central bank has made net capital investment six months in a row. Since May， the central bank has injected a net amount of over 500 billion yuan. The central bank adjusted its open market operation structure， with the intention to increase its repurchase of central bank bills whose maturity are less than one year as well as reduce the issue of 3-year central bank bills. The central bank has revealed its intention to inject capital into the market， by prioritizing short-term bills， reducing long-term freezing of funds， and increasing the amount funds due in the next half year.Therefore， we can see that the European sovereign debt crisis has distinctly slowed down China’s financial measures， and consequently put off financial policy’s “exit” process.4. The European sovereign debt promoted China’s industrial restructuringAlthough the European sovereign debt crisis has exerted some negative impact on China’s exports， in the long run， it will promote China to carry out industrial restructuring， shifting away more firmly from depending on exports to expanding domestic demand for economic development. In 2008， Chinese government injected 4 trillion yuan to stimulate the economy out of crisis and ensure reasonable employment and social stability. In 2009， the government provided another 10 trillion yuan credit to the market. All these measures led to further production scale expansion of enterprises of with excess capacity， instead of encouraging them to restructure effectively. Excess capacity and lack of coordination of economic structure have apparently revealed themselves.To some extent， the European sovereign debt crisis has promoted structural transformation of China’s industrial sectors. On the one hand， shrinking orders from the Europe would force exporters into transformation. On the other hand， dim prospect of export might trigger fierce competition among export enterprises of the same industry. Only the fittest will survive， and some small and medium sized enterprises may be taken over by large， competitive ones， which may help a certain industry to form economies of scale and improve the overall competitiveness of China’s export.5. Lessons we can learn from the European sovereign debt crisisSpreading of the European sovereign debt crisis provoked people’s thinking over this kind of crises. Distinct from the sub-prime mortgage crisis originating in the United States， this is a sovereign debt crisis triggered by ever increasing unpaid debts that are due in Greece and other countries that temporarily covered their excess fiscal deficit with currency swaps. It can be seen that inability to dissolve fiscal deficit and inadequate monitoring and controlling on debts should be responsible for this crisis.China should examine its debt problems， taking into consideration its real conditions. The Chinese government has been relatively successful in controlling the fiscal deficit. In 2009， China’s fiscal deficit accounted for less than 3% of GDP， and the total debt accounted for less than 20% of GDP， far below international debt warning line of 60%. However， we should be clearly aware that China also has many debt problems. In particular， the large amounts of local government debts are undeniable. According to statistics from the Audit Commission， the debt ratio of local governments is as high as 300%， in which potential risks are lurking for the Chinese government. The Chinese government should regard the European sovereign debt crisis as an alarm and overhaul and regulate comprehensively local government debts.On the one hand， fiscal revenue sources of local governments should be expanded. All along， the tax-sharing system between central and local governments has， to a great degree， limited the amount and sources of local governments’ fiscal revenue. At this stage， to meet the requirements of local development， local governments of all levels have no choice but depend on land sales as income and meet financial demand by large amounts of debts. Therefore， it’s necessary to carry out tax revenue system reform， promoting stable growth of local revenues by multiplying revenue sources.On the other hand， budgets of local governments should be strictly supervised through legislation. The absence of a set of comprehensive and effective regulatory regime also contributes to the imbalance of local debts. Therefore， legislation can help to regulate the size， quality and usage of debt financing， reducing risks of huge amounts debts. In addition， another necessary measure to monitor local government debts is regular， compre- hensive examination and assessment of local government debt conditions.(Author: from Finance Department in School of Economics of Xiamen University， Xiamen 361005)