The Impact of Euro Depreciation on the Chinese Economy

By+XIANG+ANBO

THE Eurozone， one of the worlds largest econo- mies， has become a runner in the United States， Japan， and Britains QE “relay race.” In late January 2015， the European Central Bank （ECB） announced its launch of QE （Quantitative Easing）， so ending longstanding conjecture. But the scale of more than € one trillion was way beyond anyones expectations. This monetary program creates more abundant global market liquidity and changes the global monetary pattern. Its huge money supply and historic monetary policy will cause great uncertainties in the Eurozone and in the global flow of capital， and changes also to the exchange rate， the economic and trade situation， and other variables. The ECB launch of QE has not only influenced the Eurozones economy， a spillover effect having already become apparent， but also jolted the global economy， intensifying the risk of monetary war among global central banks. It will inevitably have impact on the Chinese economy.

Impact on Chinese Economy

Bearing in mind that the US dollar functions as an international currency， and that the United States is the worlds biggest economy， the impact of the ECBs QE program on emerging economies， including China， compared to that of the U.S.s QE is relatively small. But it nevertheless affects Chinas international trade and international investment.

The Eurozone QE has both positive and negative impact on China. On one hand， under the backdrop of normalization of U.S. monetary policy， the ECB QE is conducive to mitigating the contractionary effect of the U.S.s QE exit. On the other， the polarization trend of main economies will affect the exchange rate between major currencies， so exacerbating fluctuations in international financial markets， especially in the foreign exchange market. This will intensify the cross-border mobility of capital in Chinas financial markets， and the consequent difficulty of managing expectations and exchange rate movements. Moreover， Chinas inadequate endogenous growth momentum will heighten pressure to stimulate domestic demand and apply a loose monetary policy.

As regards international trade， the ECB QE will have impact on the exports of emerging market economies， including China. Sharp euro depreciation will cause relative appreciation of the currencies of emerging market economies， including the RMB. This will intensify competitive devaluation of global currencies. This means that all enterprises and commodities exported to Europe face exchange rate risks. The RMBs inadequate flexibility due to excessive firmness of Chinas real effective exchange rate （REER） will constrain Chinas exports to the Eurozone. Those to other countries and regions will also be affected.endprint

But everything is dialectic. In view of China and the Eurozone countries different export structures， the euro QE will have limited impact on Chinas exports as a whole. In the longer term， if the EBC QE is as effective as the Fed QE， the Eurozones economic recovery and consequently expanded European demand will boost Chinas exports.

As regards international investment， since global investment opportunities are mainly concentrated in China and the United States， a considerable portion of increased liquidity by virtue of European QE will flow into China. This will stimulate the Chinese economy， for instance by promoting its modern service industries. Similarly， the relative appreciation of the RMB against the euro will encourage Chinese enterprises to invest in Europe， and advance the “going global” process based on the Belt and Road Initiatives. However， it will also trigger a sharp rise in cross-border capital mobility on the Chinese financial market and increased management and risk control pressure.

New Measures to Deal with Euro Depreciation

To the Chinese government， the great logic for Chinas economic development now and in the future is to understand， adapt to， and guide the new normal. Even under the backdrop of euro depreciation， China is unlikely to join the competitive currency depreciation process. Instead， China will try to adapt to the new normal of exogenous shocks， including the ECB QE. The fundamental idea is to activate endogenous growth momentum through system design and further reform and openingup， thus accelerating innovation and development.

Further opening-up means improving Chinas economy and deepening and improving its integration into the global economy. China will be more proactive in global economy governance， and adopt more constructive mea- sures to tackle global climate change and transform world financial governance systems. Bringing into effect the Belt and Road Initiatives， opening special economic areas such as free trade pilot zones， and reforms to the foreign investment access system and the management system of outbound investment will deepen connections and cooperation between China and the world. It will in effect consolidate the existing relationship of mutual benefit and win-win results. The global economy stands to gain from Chinas relatively high speed and higher quality economic development.

The new normal demands that China pays greater attention to nurturing new economic drivers， with innovation at the core. China produces almost seven million college graduates annually， and is rich in high-caliber human resources. The next steps are to adapt to the changes in internal and external environment and development conditions， grasp the trend of scientific and technological development， and promote marketization of intermediate and high-end productive elements， and moreover to activate and integrate innovative resources and to respect and protect intellectual property rights. This entails innovations to the development engine that will guide， promote and achieve Chinas transformation from a big innovative country to a strong innovative country. Thoroughgoing innovations as a result of rational system design and mass undertakings will construct Chinas new pattern of economic development， so adding impetus to Chinas economic development.endprint

Judging from the direction of Chinas monetary policy， in 2015 China will continue to carry out a flexible， moderately prudent monetary policy and fine tune it towards timely “easing.” In the short term， the main objective is to practice countercyclical fine tuning. The long term objective is to promote long-term reform， raise the level of financial service and management， and improve economic performance. It is clear that the EBC QE has not changed Chinas judgment of adapting to the new normal， and has limited impact on Chinas decision to continue its prudent monetary policy.

In addition， a synthesis of the projections and research by domestic and foreign scholars shows that， due to a tendency of Chinas exports towards stabilization of the external environment， and a change from decline to stability in the competitive edge of Chinas exportoriented enterprises， it is very likely that 2015 will see an end to the decline in growth of Chinas exports， which are indeed expected to grow around seven percent in 2015. Chinas investments， meanwhile， will stabilize at an estimated 16 percent growth， and consumption will maintain an estimated stable growth of around 10 percent. Judging from market demand， and exports， consumption and investment having stabilized， therefore， Chinas economic growth will either reach or slightly exceed seven percent in 2015. It is thus clear that the ECB QE will exert limited impact on Chinas economic development， and may even send it into a more stable， sustainable and better quality development orbit.endprint