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The Influence of fiscal crisis in Europe on China

 Response to the deeping fiscal crisis in Europe by Chinese capital market

- Stock Market: Shanghai Composite Index has dropped by around 500bp during the two months since April. The investors are becoming increasingly cautious regarding investment in stocks, which is a key factor behind the bear market.
- Foreign Exchange Market: Yuan against Euro has appreciated 16% since the beginning this year, thus effective exchange rate has increased significantly.
- Money Marker: Interbank dollar offed rate has risen from Libor+27bp at the beginning
of April to Libor+100bp at the middle of May, posing the difficulties for banks in securing dollar funding.
- Foreign Reserves: CIC has reported a 10% investment loss during the last two months, and it has brought up a reexamination of the foreign exchange reserve investment strategy.
- claims to European Banks: Considering Chinese financial institutions' small exposure to European bank claim, the impact of common credit channels in China will be very limited.

The impact of fiscal crisis in Europe on China' real economy through export channel

- Since the exports to PIIGS accounts for less than 4% of total exports and exports items to European countries mainly flow to production market rather than consumption market, thus, the impact on China's exports has not yet been visualized.
- However, from 2H of 2010, the growth of exports are expected to slow because of depeciation of euro, and decline of total demand in Europe and the possible slowdown of global economy caused by financial tremors out of Europe.
- The rapid drop of foreign trade that happened after global financial crisis is not likely
to represent this year, because the current trade finance situation is much better than that during global financial crisis.

The impact of fiscal crisis in Europe on China's Macroeconomic policy

- Chinese authority is taking a more cautious stance in exit strategy, due to the increasing global and domestic economic uncertainty
- The government's anti-crisis management has been strengthened, At the end of April, State Administration of Foreign Exchange announced to plan to cut bank's foreign debt holding quota by 10~20%.
- In order to mitigate China‘s Sovereign risk, the central government is now tightly managing provincial government debt, becoming more cautious in fiscal expansion, and is reassessing the distribution of taxes between the central and provincial governments.