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US debt crisis, weak dollar to dent export earnings

The sovereign debt crisis in the US will affect exports from China as the US is a major destination and a major market for Chinese exports.

With most of the export earnings being in the form of US dollar payments, a weakening of the greenback will further dent the earnings of Chinese exporters. To make matters worse, Europe, the largest market, is also facing uncertain times, while the euro is falling.

China is the world's largest exporter, and most of its economic growth comes from rising trade.

"The current US debt crisis is similar to the 2008 financial crisis. When purchasing power declines in the US, it will have a direct impact on Chinese exports," says Bai Ming, a researcher with the Ministry of Commerce.

"Over the next few years, Chinese manufacturers will have to contend with even more sluggish demand, renminbi appreciation and other trade problems," says Zhang Ming, a researcher at the Chinese Academy of Social Sciences. "With the odds loaded heavily against them, there is very little that the Chinese exporters can do, than further improve their core competencies."

Zhang says the passive appreciation of other currencies, especially the renminbi, will be a direct result of the weaker dollar, which again constrains China's exports.

Bilateral trade volume between the China and the US was $385.34 billion (270.18 billion euros) in 2010, accounting for over 12.9 percent of China's total trade value. The EU, China's biggest importer, is also facing the risk of a slowdown in economic growth.

Some analysts feel that the US rating downgrade will prompt China to reduce its dependence on the export-led economy and focus more on stimulating domestic demand.

Zhao Qingming, an economist at China Construction Bank, says that the US downgrade will ring alarm bells on the trade balance front.

He feels that the US downgrade may lead to an acceleration of the economic transition in China. "Since low growth seems likely in the US, the EU and Japan, the Chinese economic transition becomes more urgent and demanding. China's role as the factory of the world has come to an end, and an upgrading of its industries is vital," says Zhao.

"China's economic transition and upgrade started with the 2008 economic crisis when the nation decided to boost domestic demand. The fresh crisis will help reshape China's economy," says Zuo Xiaolei, chief economist at China Galaxy Securities.

The debt crisis will also shuffle the decks of Chinese export enterprises and replace labor-intensive industries. "The US will request China to open its market further, and put more pressure on the yuan. To protect its domestic economy, the US will resort to more trade protectionist measures that will put further pressure on Chinese exports," says Sun Lijian, a professor at Fudan University.

Sun says if the slump in the international markets prolongs, many of the privately-owned enterprises in China will start facing cost pressures. Increased capital inflows will also trigger asset bubbles, bringing more risks to China's economy.

However, some analysts are still optimistic about Chinese exports. "China has shown an ability in the past to boost its exports even under difficult circumstances," says Derek Scissors, a research fellow at the Heritage Foundation.

Ariel Tung contributed to this story.