However, experts interviewed by People's Daily largely believe that the crisis is unlikely to phase the huge Chinese economy and the trend of China's economic recovery will remain unchanged.

Exports and capital market most exposed

Since the beginning of 2010, the euro exchange rate against the RMB has dipped 14.3 percent from 9.8 yuan per euro to 8.4 yuan per euro. Industry insiders believe the drastic decline in the euro will likely slow down the European economy and subsequently curb demand.

In 2009, China's exports to the European Union totaled 236.2 billion U.S. dollars, accounting for almost 20 percent of China's total exports. Exports to Greece, Spain, Portugal, Ireland and Italy, the countries most affected by the crisis, amounted to 41.7 billion U.S. dollars, about 3.5 percent of China's total exports, or 18 percent of China's exports to the European Union.

"The European Union has become one of the largest trade partners of China and the European debt crisis has posed increased fiscal pressure on each county of the European Union, said Guo Feng, director of the Research and Consulting Department of Northeast Securities. "To reduce debts, governments of the countries will raise tax rates and cut expenditures, weakening their country's consumption. This, plus the depreciation of the euro, will considerably weaken their import capacity and hurt China's foreign trade."

Although the impact of the debt crisis on China's real economy remains to be seen, its impact on the domestic capital market has been evident.

Over the past month, the domestic stock market has turned from a bullish market to a bearish market and continues to decline. Although the regulation and control policies in the real estate market are the principal reason behind the fall of the stock market, the crisis in external markets has deepened the bearish atmosphere.

"There are concerns that diminished investment growth due to the regulation of the real estate market along with the weakened expectations on exports because of the debt crisis will cause the Chinese economy to drop back considerably in the second half of 2010. The recent poor performance of the stock market is just the reflection of such a pessimistic expectation," Guo added.

Impact on the Chinese economy remains limited

Although the European Union debt crisis came with terrifying force, it only took place in certain countries and did not truly spread. The impact on China will be limited if the crisis does not occur in the major countries of the European Union.

"The euro zone's sovereign debt crisis is different from the subprime crisis that happened in the United States and will not have any major impact," said Li Gang, head of the Europe Research Department of the Chinese Academy of International Trade and Economic Cooperation (CAITEC) under the Ministry of Commerce.

"At present, the major economic entities such as Germany, France and Holland remain relatively stable. Though the liquidity crisis has appeared in some countries, including Spain and Portugal, these countries have an economic structure different from that of Greece," said Ding Chun, director of the Center for European Studies under Fudan University.

Zhou Chunsheng, professor of finance at Cheung Kong Graduate School of Business, said China's exports to the European Union will be impacted, but in the long term, it may not be a bad thing. Because China's industrial structure urgently needs transformation from depending on exports to expanding domestic demand, the decrease of European orders will force some export-oriented enterprises to transform their industrial structure, which to a certain extent, can be considered an opportunity.

On the whole, the European Union debt crisis has a limited impact on China's economy, and to a certain degree, it can relieve China's overheated economy. Though we hold an optimistic attitude on the future of the Chinese economy and even the world economy, we still need to remain vigilant to the short-term risks of the crisis.

Source: People's Daily Online