June 5th, 2012
08:08 AM GMT
Hong Kong (CNN) – China is drafting plans on how to deal with the financial fallout if Greece leaves the eurozone and its economic implications for Beijing’s largest trading partner, according to state-run media.
"The government is working on plans for the worst-case scenario of Greece leaving the eurozone later this year," Wang Haifeng, director of international economics at the Institute for International Economic Research, told state-run China Daily Tuesday.
China Daily quotes unnamed sources as saying the ministries of finance and commerce will examine the potential impact of a Greek exit on exchange rate, capital flows and trade.
The biggest concern for the world’s second largest economy isn’t the departure of Greece itself, but the knock-on effect its departure would have on the 17-nation bloc financially united under one currency. The Greece departure would roil China’s capital markets, put pressure on its exchange rate and damage trade at a time when the government is trying to cushion its decelerating economy from a hard landing, analysts say.
“Chinese officials should be under no illusion that the country will be immune to financial contagion. A “Grexit” would hit European banks that hold peripheral eurozone countries’ sovereign bonds,” economist Yu Yongding, a former central bank advisor, wrote last week in a widely syndicated article. “Shock waves from the deleveraging would, in turn, spread to emerging markets like China.
“Although the exposure of Chinese banks and financial institutions to eurozone sovereign and banking-sector assets is negligible, post-Grexit capital flight from risky markets could rival, or even surpass, that in the weeks following Lehman Brothers’ collapse in September 2008,” Yu wrote. “Compared to 2007 and 2008, foreign investors’ holdings in emerging markets are much higher, owing to these countries’ relative economic strength in recent years and rock-bottom returns on developed-market financial assets.”
Warnings on the impact of a Greek exit come amid signs that China is weighing stimulus options to spur growth. Meanwhile, the Financial Times reports that concrete companies – a bellwether industry for China’s once booming property market – are showing signs of a credit bubble. And the government has warned that Chinese steel trading companies have “borrowed excessively from banks and then used the funds to speculate on property and stocks,” according to a banking regulation directive viewed by the Financial Times.
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