The euro has plunged against the renminbi in recent weeks, at one point Monday reaching its lowest level since late 2002.
The steep rise of the renminbi prompted a Commerce Ministry official in Beijing to warn Monday that China’s exports could be threatened. The official’s comments, the most explicit yet on the implications for China of Europe’s recent financial difficulties, suggest that even the world's fastest-growing major economy, and increasingly the engine of global growth, is not immune to the crisis that started in Greece and threatens to spread across much of Europe.
“The yuan has risen about 14.5 percent against the euro during the past four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China’s exports to European countries,” Yao Jian, the ministry’s spokesman, said at a news conference in Beijing, according to news services.
Some economists warn that there may be much worse to come. The biggest reason why Chinese exports plunged early last year was not weakening demand in industrialized countries but a sudden, temporary disappearance of trade finance. The availability of trade finance could easily become a serious problem again soon, said Dong Tao, the chief Asia economist at Credit Suisse.
Chinese exporters rely very heavily on bank letters of credit to finance their shipments. The availability of the letters of credit is closely linked to overnight lending rates between banks. When banks have trouble borrowing money themselves, they tend to cut sharply the issuance of letters of credit for trade finance as a quick, easy way to conserve cash without violating the terms of other financial obligations, like established lines of credit for big corporations.
Interbank lending rates surged late last week and on Monday and must now come back down very quickly to persuade banks to keep issuing letters of credit, Mr. Tao said. “Without trade finance, trade won’t happen,” he said.
The Shanghai stock market plunged Monday, with the composite index falling 5.1 percent on worries about global demand as well as concerns about possible further moves in China to limit a steep rise in real estate prices this spring.
Some Chinese companies are already running into difficulty because of the euro’s fall against the renminbi.
“We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins and then some,” said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, China, which makes gas stoves, heaters and water heaters.
“They say they cannot increase the prices at their end to their customers, given intense competition in their marketplace,” Mr. Xu added.
The renminbi is rising along with the dollar against the euro. The Chinese government has continued to intervene heavily in currency markets in recent weeks to prevent the renminbi from rising against the dollar, maintaining an informal peg of 6.827 renminbi to the dollar, the level since July 2008.
Because American companies in particular compete in the Chinese market with European companies in many industries, the euro’s weakness against the renminbi is putting American companies at a disadvantage just as Gary Locke, the U.S. commerce secretary, is leading the first cabinet-level trade mission of the administration of President Barack Obama to China this week.