Asia might be enjoying booming economic growth, but senior officials in the region are deeply worried about the potential of the European sovereign debt crisis to trigger a new 2008-style global financial crisis and bring the good times to an abrupt halt.

Chinese Commerce Minister Chen Deming expressed China’s anxiety by noting the nation’s economy faced “uncertainties” next year.

“We are paying close attention to whether Europe’s debt crisis can be controlled, and especially what will happen in the first quarter next year,” he told press conference at a joint China-EU trade forum in Beijing yesterday.

He added that China would be watching closely to see “whether Europe’s consensus on sovereign-debt and risk prevention can be turned into practical action”.

At the same trade forum, Chinese vice-premier Wang Qishan expressed China’s support for the European Union and the International Monetary Fund’s attempts to calm the eurozone debt crisis and noted that China had taken “concrete action” to help some eurozone countries deal with the sovereign debt crisis.

Beijing has previously signalled that it is prepared to use some of its massive $US2.7 trillion in foreign exchange reserves to buy bonds of countries such as Greece and Portugal.

Meanwhile, the minutes from the last Reserve Bank meeting on December 7 show that our own central bank is clearly conscious of the risks of the European sovereign debt crisis.

The minutes note that the situation in Europe deteriorated markedly in the weeks preceding the meeting, as worries over Ireland’s finances spread to Portugal, Spain, Italy and Belgium, pushing up their borrowing costs.

“Credit spreads in interbank funding markets had increased to their levels around the time of the Greek crisis in May, though they were still well below the peaks at the time of the collapse of Lehman Brothers,” the minutes said.

The minutes also pointed out that European banks were facing extra pressures because the cost of funding their large US dollar asset positions had been rising.

An escalation of the European debt crisis poses a clear risk to the Asian region’s stellar economic growth.

In the first place, China is eager to ensure that the European economies don’t fall into a slump, because the EU is China’s biggest export market. Two-way trade between the EU and China reached $US434 billion in the first 11 months of the year — an increase of more than 30% on the same period last year.

What’s more, China enjoys a healthy — and growing — trade surplus with the EU, which widened to €122.2 billion in the first nine months of this year, compared to €97.8 billion in the same period last year.

As a major commodity supplier to China, Australia could experience a drop in commodity prices, and its export volumes, if China’s exports to Europe were to slump.

But there’s an even darker risk that a default by one of the debt-laden eurozone countries could trigger massive disruption in global financial markets. Investors would likely become panicked about the solvency of the European banking system, and the capacity of individual European countries to financially support their banks. This could feed into a massive collapse in investor confidence and a huge retreat from risk-taking worldwide. As we saw in 2008, this could again trigger a collapse in world trade, and a massive decline in global industrial production.

As the Reserve Bank minutes make clear, at this stage it’s difficult to decipher the exact impact that the worsening situation in Europe will have on the Australian economy.

According to the minutes, “Members noted that the deterioration in the situation in Europe over the past month had increased the downside risks to the global economy. How this would ultimately play out, and the implications for Australia, were difficult to predict.

“It was possible that conditions could settle down, as they had after the episode of financial instability in May. Alternatively, an escalation of the current problems was not out of the question. If this prompted a fresh retreat from risk taking in global financial markets, it would probably have more impact on Australia than any trade effect.”

*This first appeared on Business Spectator.