III. Slowed export recovery in the second half

Since the beginning of this year, global trade has maintained a recovery growth thanks to the worldwide economic rally. From January to April, the imports of three major economies—the United States, the euro zone and Japan—rose 17.5 percent on average from a year ago. Import growths for the United States, the euro zone and Japan were 20.9 percent, 4.8 percent and 29 percent, respectively, which spurred China's exports to those regions. From January to June this year, China's exports totaled $705.09 billion, up 35.2 percent from the same period in 2009 and were 5.8 percent higher than the first half of 2008 when the crisis had yet to begin. Those figures indicated China's exports had rebounded to pre-crisis levels.

China's export market has two features in the first half of 2010. First, exports to emerging markets grew faster than traditional export destinations. Second, China-to-EU export growth (36 percent) far outpaced its exports to the United States (28.3 percent) and Japan (25.2 percent), meaning exports have not been directly affected by the European sovereign debt crisis.

But due to a time difference between orders and the real transaction in international trade, the sovereign debt crisis' influence on China's exports might emerge in the second half of this year. In 2009, China's exports to Spain, Portugal and Greece reached $19.45 billion, accounting for only 1.6 percent of China's total exports. Therefore, if the European sovereign debt crisis could be confined within the three nations, its impact on China's exports will most likely be limited.

But the following three risks triggered by the sovereign debt crisis might add more uncertainties to China's exports. First of all, the European countries, out of the heavy debt burden, have universally tightened their fiscal policies. Second, the euro continues to depreciate as investors try to elude high-risk assets. Third, the sovereign debt crisis keeps spreading in the euro zone, the EU and possibly other countries in the world, and might ignite a new round of the global financial crisis. Under the first two circumstances, China's exports to the EU will be dampened as market demand in the European countries will shrink, and appreciating Chinese currency will make Chinese goods less appealing to EU customers. The third possibility is less likely to happen.

In the meantime, demands from China's major traditional importers like the United States and Japan have weakened. U.S. statistics showed its imports from China during the first four months of 2010 only grew 13.9 percent from a year earlier, making China's share in the U.S. imports drop 1.4 percentage points from the same period in 2009. Japan's imports from China in the first five months rose 22.1 percent year on year, much lower than its overall import growth of 26.9 percent.

In general, China's exports face stiff headwinds in the next half of this year, and it will be hard to maintain the same growth rate as it did in the first half. The export growth rate might be lower than 20 percent in 2010, while the trade surplus growth will shrink 20-30 percent.

In the first half of 2010, paid-in foreign direct investment (FDI) realized growth of 19.6 percent. Investment from 27 EU members rose 19 percent, indicating the debt crisis in Spain, Portugal and Greece had a limited impact on foreign investment in China.

In spite of the recovery growth, the EU's direct investment in China might decline due to shrinking liquidity and sluggish demand in the European market. The EU's gloomy economic situation will drag down foreign investment in China, but the influence could be limited. The EU's economic conundrum has also provided some golden opportunities for Chinese enterprises that have an eye on acquiring European companies. Thomson Reuters' statistics show global merger and acquisition (M&A) investment rose 6.9 percent year on year in the first half of 2010, reversing two years of consecutive decline. China's outbound M&A investment grew 260 percent during the same period.

IV. Exports growth and structural readjustment must be properly handled

First of all, China should actively participate in international cooperation and policy coordination, and prioritize stabilizing international financial market and investor confidence in new foreign-related economic policies. Experiences since 2008 showed that the enhanced international cooperation and policy coordination under frameworks like the G20 had exerted immeasurable influence on coping with the international financial crisis, and will continue to help prevent the sovereign debt crisis from spreading. In recent years, China's function and importance in global economic management have been on the rise. Especially after the outbreak of the global financial crisis in 2008, the fast-recovered Chinese economy and enormous foreign reserves have given China a greater say in dealing with global problems.

Second, China should clearly state its stance in maintaining the current reserve asset structure and supporting the stabilization of the euro, so as to stabilize market expectations and prevent China's euro assets from devaluing. In recent years, out of concerns of diversifying reserve assets and reforming the exchange rate regime, many scholars suggest increasing the proportion of the euro in the reserve assets and in its basket of currencies. This necessity will not change no matter how volatile the European financial market is. The current speculators' elusion of the euro asset had dragged down the euro and made the euro assets less expensive. Upon the reasonable evaluation of potential risks and the euro's future trend, the selective accumulation of the euro assets not only helps stabilize the European financial market and investor confidence, but also will be conducive to diversifying our reserve assets and the adjustment of the basket of currencies.

Third, China should actively cope with the pressure and challenge posed by the European sovereign debt crisis, take advantage of the new opportunities of foreign trade development and implement appropriate policies. Domestic enterprises are encouraged to go out to play in the international market and carry out M&As in the European market to gain resources like product brands, technology, management and marketing expertise. The foreign trade policies must be further optimized in terms of export tax rebate and export credit insurance. Bilateral and regional multilateral cooperation with emerging markets must be quickened through implementation of free-trade areas and measures that can conveniently facilitate bilateral trade. China's investment environment should also be further improved to attract more multinational companies to invest in China.