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China braces as European crisis adds to strains

() - December 7, 2011 - 12:00am

HONG KONG (AP) — Europe’s festering debt crisis is adding to strains on China just as the country is pricking its property bubble and facing a manufacturing downturn, limiting the ability of the world’s No. 2 economy to prop up global growth.

Leaders in Europe are navigating a crucial week as they work to find a breakthrough at a summit Friday to avoid the disintegration of the euro common currency and the global financial panic that could ensue.

Such a scenario would slam China by crimping economic growth through lower demand for its exports. It would also prompt Beijing to slow the rise of its currency to a crawl — exacerbating trade tensions with the US and other nations that say China’s yuan is already too cheap.

Even if the euro common currency shared by 17 nations remains mostly intact, China and other Asian countries will still face the daunting prospect of a recession in Europe next year and anemic growth in the US — both crucial markets for the region’s cars, electronics, textiles and other exports.

During the 2009 global recession, China’s ‘shock and awe’ style stimulus kept its booming economy on track. For Asia and other parts of the world, it helped soften the impact of the economic upheaval. The stimulus also unleashed high inflation, a torrent of low quality bank lending and uninhibited partying in the property market. Beijing is still trying to contain those distortions, meaning its response to a new downturn will be much more restrained.

The effects of Europe buckling beneath debt, austerity and financial market turmoil, and sloth-like growth in the U.S., are already being felt in China. Factory production shrank in November for the first time in nearly three years, and labor unrest is increasing as employers cut staff.

“Our suppliers here in China are beginning to be a lot more aggressive in trying to get business, which I put down to the fact that they’re beginning to feel the pinch,” said Christopher Devereux, who runs a company in Guangzhou, southern China sourcing high-quality lightweight parts for the automotive and mining industries.

“We’re getting calls from suppliers looking for business — that I’ve only noticed in last three weeks,” he said. Suppliers are now open to negotiating over prices, a sharp change from the past when their attitude was take-it-or-leave-it.

Other Chinese exporters say orders have dropped by 10 to 30 percent from normal times because of slumping demand in Europe and the US, according to Stanley Lau, deputy chairman of the Hong Kong Federation of Industries.

Factories that are getting orders say they are smaller than before and customers are placing them at the last possible moment because they want to be as sure as possible a product will sell, he said.

“We will not expect that there will be great improvement until fourth quarter of next year,” said Lau, who also owns a watch factory in southern China. “Of course this is only a hope. We never know what will happens in Europe — whether the situation will go further downhill.”

BEIJING CHINA CHRISTOPHER DEVEREUX EUROPE FOR ASIA GUANGZHOU HONG KONG FEDERATION OF INDUSTRIES LAU OTHER CHINESE STANLEY LAU
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