Why China ‘Spillover’ Poses Risks for the Euro Zone

China’s economic slowdown could pose risks for the euro area ranging from falling exports, capital outflows and exchange rate fluctuations, the European Central Bank (ECB) said on Wednesday.

China is now the second-biggest economy after the U.S. and plays an increasingly major role in global trade. Its economy has slowed each year since 2010 and is seen continuing to do so until at least 2016, when the International Monetary Fund forecasts growth of 6.3 percent.

“The slowing of growth in China since the beginning of 2015 has reduced euro area exports, in particular exports of machinery and transport equipment. This has had adverse repercussions, in particular, for exporters of manufactured goods, which account for almost 90 percent of goods exports to China,” the bank said in Wednesday’s “financial stability review.”

The ECB, which controls monetary policy in the 19 countries that use the euro, said that a 1 percentage point slowdown in Chinese real gross domestic product (GDP) would knock around 0.1-0.15 percentage points off euro area activity after two to three years.

An economic “confidence shock” — perhaps due to a worse-than-expected slowdown in China — could lead to a tightening of financial conditions in emerging markets and a “further slowdown of euro area foreign demand,” the ECB said.

“Moreover, capital outflows from China, if not counterbalanced by other private or official flows, could trigger a depreciation of the Chinese currency and, in its wake, exchange rate depreciations of other emerging market currencies,” it added.

CNBC

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