December 5th, 2011
04:29 AM GMT
Hong Kong (CNN) – There are a lot of critical meetings scheduled this week in Europe, and Asia is watching.
There's no more talk now of financial decoupling from developed economies. The global economy is tightly interwoven and as Yonghao Pu, chief investment strategist of UBS Asia Pacific, frankly says, "At the moment, we (Asia) are kind of a hostage to what's going on in Europe."
We're seeing the weakness in the global economy force China's hand.
Beijing recently relaxed capital reserve requirements of its major banks after already loosening requirements for some rural banks. This was to make it easier for the banks to make loans and to partially offset the ripple effects of the global economy. China's latest PMI data have shown manufacturing contracting because of reduced demand. Europe is China's biggest export market. If Europe goes into a recession, Asian exports will certainly suffer a huge dip.
“The argument that China should rescue Europe does not stand, as reserves are not managed that way,” Fu Ying, China’s vice minister for foreign affairs, said in comments reported by the state news media. China has the world’s highest level of reserve foreign currency - some $3.2 trillion.
Still, a huge amount of bank loans in Asia actually originates from Europe. "The negative news on Asia is that European banks are big lenders. We're talking $1.3 trillion of lending from European banks into Asia," Garry Evans, HSBC's Global Head of Equity Strategy, told me last week.
"If we see a credit crunch in Europe - the banks not able to lend so much - then they're going to pull out lending from Asia first rather than from home companies."
Evans also makes the point that Asian stock markets depend heavily on foreign investors. If European investors start to sit on cash instead of trading equities, money will flow out of Asia.
While Asia is in a better financial position than Europe, it's very much exposed to the cracks we're seeing in the eurozone.
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