China May Delay Tightening on Europe Crisis, BNP Says

May 21 (Bloomberg) -- China may delay raising borrowing costs, revaluing its currency and implementing property taxes as the deepening European crisis threatens global growth, according to BNP Paribas.

“We understand that Chinese policymakers have noticed the interaction between structural tightening and a possible double- whammy effect on growth,” BNP Paribas analysts Chen Xingdong and Isaac Meng said in a report. “We expect the government to become more cautious in additional tightening measures.”

Chinese Premier Wen Jiabao said May 18 the global economic crisis is more complicated and serious than expected and the foundations of the recovery remain fragile, China Central Television reported. Europe is China’s biggest export destination, making up 20 percent of its total overseas sales.

The Shanghai Composite Index has fallen 5.2 percent this week on concern the Europe crisis may slow China’s exports to the region and the government will step up tightening measures to prevent asset bubbles.

The gauge has lost 21 percent in 2010, making it Asia’s worst performer, as the government raised mortgage rates and down payments in April to curb real-estate price gains, while the central bank this month ordered banks to set aside more deposits as reserves for a third time in 2010.

A weeklong rout in global stocks deepened yesterday on concern that European governments are divided on resolving financial turmoil in the region. French Finance Minister Christine Lagarde said that the 16 countries that share the euro need greater coordination.

‘Unlikely’ Yuan Change

The BNP analysts forecast a “limited” rate increase late in the third quarter, while a revaluation of the yuan is “increasingly unlikely.” The Chinese currency has appreciated more than 14 percent against the euro in the past four months and the gain is putting pressure on China’s exporters, Ministry of Commerce spokesman Yao Jian said May 17.

China can wait until the second half of 2010 or next year to raise interest rates as economic growth slows, the state-run China Securities Journal newspaper said in a front-page editorial yesterday.

The growth of China’s exports to Europe may slow by six to seven percentage points in May, June, and in the third quarter of the year as Europe’s debt crisis deals a “severe” blow to foreign trade, the Shanghai Securities News reported May 19, citing Huo Jianguo, a researcher at the Ministry of Commerce.

The negative effects from the European debt crisis on Chinese economy will be “manageable,” according to Morgan Stanley. Europe’s weakness will help China avoid a worse-case scenario of overheating, Morgan Stanley analysts Qing Wang, Steven Zhang and Ernest Ho wrote in a note to clients yesterday.