The rapidly rising euro has been an immense boon for Chinese exporters and is likely to throw a lifeline to the SARS-hit economy this year, state media and economists said yesterday.
China's trade surplus is forecast to get a US$2.5 billion boost because the Chinese yuan is effectively pegged to the US dollar and has followed it in its fall against the euro, the China Daily reported.
"The weak US dollar is giving China a windfall," said Chen Xingdong, chief economist with BNP Paribas Peregrine in Beijing.
"It's positive for Chinese exports and for foreign direct investment," he said.
The euro has risen from 8.4 yuan late last year to 9.7 yuan, dramatically increasing China's competitiveness in the eurozone, one of its most important markets.
The value of Chinese exports to Europe soared 48.6 percent in the first four months of the year to US$16.3 billion, according to official Chinese statistics.
The rise reflects thriving business for enterprises such as Hong Kong-invested, China-based garment factories, which sell 75 percent of their products to the European market, according to the China Daily.
Not all foreign investors are happy as some of them -- including automakers -- now have to import parts from Europe at vastly increased cost, the paper said.
The gain in exports to European markets has also come at a cost to the eurozone's own labor force.
Reacting to the cheaper yuan, German, Dutch and other European companies have speedily moved production to China, exporting back to their home countries from there.
As many large European enterprises already have operations in China, this has been fairly simple as they have merely had to expand capacity.
"That's why they have been able to react so quickly to the rising euro," said Andy Xie, Hong Kong-based managing director at Morgan Stanley Dean Witter.
The China Daily said the momentum is expected to continue for the rest of the year, quoting estimates that the stronger euro will cause Chinese exports to Europe to rise by US$1 billion.
As the appreciating euro will likely cause a cut in imports from the eurozone of US$1.5 billion, the net effect will be an extra US$2.5 billion added to the trade surplus, according to the newspaper.
Assuming that the trade surplus this year will roughly remain unchanged from last year at US$30 billion, it means the rising euro will boost the surplus by about 8 percent.
The impact on China's economy this year could be to add another 0.5 percentage point or more to overall growth, according to ana-lyst estimates.
That could be good news for policy makers in Beijing, who are facing the likely economic fallout of the outbreak of SARS.
Many international economists have knocked 1.5 to 2 percentage points off China's forecasts for this year, officially set at 7 percent growth, due to the impact of SARS.
At the same time, since strong Chinese exports to Europe are a direct effect of the Chinese yuan's peg to the US dollar, calls could emerge for moves to reform China's currency markets or even for the yuan to be revalued.
However, this would entail fundamental changes in the financial system, since the yuan is only convertible for trade on the current or goods and services account, but not for funds intended for investment, the capital account.
"For the currency to become completely convertible will probably take another five to 10 years," Chen said.
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