Deterioration in eurozone crisis may slow Chinese economy

A further deterioration in the eurozone debt crisis could slow China's economic growth, a team of economists said in a report released on Friday.

The economists from the National University of Singapore and China's Xiamen University projected a growth of 7.68 percent for the Chinese economy this year, followed by 8.93 percent in 2013.

The forecasts were based on the latest projections by the International Monetary Fund (IMF) for the eurozone and the United States. The eurozone is expected to contract by 0.3 percent this year and grow by 0.7 percent next year, whereas the U.S. economy is expected to grow by 2 percent and 2.3 percent, respectively. Decisive actions are expected of the eurozone political leaders to prevent the crisis from deteriorating, and of the U.S. congress to manage to avoid the potential "fiscal cliff."

Based on such assumptions, the Chinese economy is forecast to grow 7.47 percent in the third quarter this year and 7.52 percent in the fourth quarter.

This is in comparison with the growth of 7.6 percent in the second quarter, which was the slowest in three years.

However, if the eurozone leaders failed to reach the much needed consensus, leading to a contraction of 0.5 percent for the eurozone this year and a contraction of 0.3 percent next year, China's economic growth is projected to be slowed further to 7.56 percent this year and 8.22 percent next year.

These represent a further slowdown of 0.12 percentage point this year and 0.71 percentage point next year.

"The potential recession in the eurozone both this year and next year is expected to deal a blow to China's exports, especially the exports to the eurozone, which will fall by 11 percent. This will reduce China's economic growth by some 0.7 percentage point," said Chen Kang, a professor from the Lee Kuan Yew School of Public Policy, National University of Singapore.

Chen led the research together with Lai Xiaoqiong, a professor from the Wang Yanan Institute for Studies in Economics, Xiamen University.

Nevertheless, Chen said such a slowdown is not anything huge for the Chinese economy, which has been growing at around 10 percent per year over the past decades.

"One of the reasons is that the exports to other regions such as the United States will still see growths, though the exports to the eurozone will fall. A second reason is that the export prices have been relatively stable," he said.

The team projected a growth of 7.03 percent for China's domestic consumption this year. The fixed asset formation will grow by 7.83 percent and the exports will grow by 8.57 percent, while imports will grow by 7.08 percent.

The consumer price index (CPI) inflation will slow further to 1. 73 percent in the third quarter before rebounding slightly to 1.88 percent in the fourth quarter. The full-year CPI inflation will average 2.55 percent this year, followed by 2.42 percent next year.

Lai said China's growth of 7.8 percent in the first half of this year is still "remarkable" given the current global economic conditions and remains above the official growth forecast of 7.5 percent announced at the beginning of the year.

Chen said the relatively developed coastal provinces of China will be impacted the most by the eurozone weakness. However, this could be an opportunity for the coastal provinces to restructure their economy, too.

He cautioned against over relaxing of the monetary policies, saying that it may not translate into productivity growth as expected and could end up a problematic waste.