How Euro Crisis Is Hurting China

On CNBC: Europe’s Debt Crisis Is Casting a Shadow Over China

Intersting issues pointed out in the article

The exchange rate issue.

• “The yuan has risen about 14.5 percent against the euro during the past four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China’s exports to European countries,” Yao Jian, the ministry’s spokesman, said at a news conference in Beijing, according to news services.

Possible trade finance issue.

• Some economists warn that there may be much worse to come. The biggest reason why Chinese exports plunged early last year was not weakening demand in industrialized countries but a sudden, temporary disappearance of trade finance. The availability of trade finance could easily become a serious problem again soon, said Dong Tao, the chief Asia economist at Credit Suisse.
  
  Chinese exporters rely very heavily on bank letters of credit to finance their shipments. The availability of the letters of credit is closely linked to overnight lending rates between banks. When banks have trouble borrowing money themselves, they tend to cut sharply the issuance of letters of credit for trade finance as a quick, easy way to conserve cash without violating the terms of other financial obligations, like established lines of credit for big corporations.
  
  Interbank lending rates surged late last week and on Monday and must now come back down very quickly to persuade banks to keep issuing letters of credit, Mr. Tao said. “Without trade finance, trade won’t happen,” he said.

Cancelled orders.

• “We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins and then some,” said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, China, which makes gas stoves, heaters and water heaters.
  
  “They say they cannot increase the prices at their end to their customers, given intense competition in their marketplace,” Mr. Xu added.

The damage...

• The euro’s difficulties have also inflicted tens of billions of dollars in losses on the value of China’s $2.4 trillion in foreign exchange reserves, according to Western economists. China had been trying to limit its dependence on U.S. Treasury securities for those reserves in recent years, fearing that the United States might someday suffer from budget problems or inflation, and did so by expanding its holdings of European government bonds.