Nov. 14 (Bloomberg) -- European finance chiefs will tell China this month to allow faster gains in its currency or risk ``triggering protectionist tendencies,'' according to the draft of a confidential briefing document.

As China's trade surplus with the European Union grows by $20 million an hour, EU governments are stepping up complaints that an undervalued yuan threatens their economies by hurting exporters. The lobbying for a stronger yuan is set to intensify when an EU delegation led by Luxembourg Prime Minister Jean- Claude Juncker and European Central Bank President Jean-Claude Trichet visits Beijing in two weeks.

China's commitments ``regarding exchange-rate flexibility should lead to an accelerated appreciation'' of the yuan, according to the briefing paper, which is labeled ``for bilateral contacts'' and was prepared by aides for this week's meeting of European finance ministers in Brussels. Failure to change ``risks triggering protectionist tendencies that may affect EU-China economic relations,'' it said.

The warning is being made after the euro area's trade gap with China widened 25 percent to a record 59.9 billion euros ($87.1 billion) in the seven months through July. At a time when demand from the U.S. is slowing, the fear is that European exporters may increasingly lose market share to Chinese rivals, removing a key source of strength for the European economy.

Cape Town Meeting

Trichet and Juncker's trip to Beijing, on which they will be accompanied by EU Monetary Affairs Commissioner Joaquin Almunia, comes as growing international pressure is applied on China for it to shift its currency. Finance ministers from the Group of 20 are set to discuss the topic when they meet near Cape Town this week, while U.S. Treasury Secretary Henry Paulson makes his own visit to Beijing next month.

``A major risk China faces is that its government won't act quickly enough to take the policy steps necessary to deal with the economic and social imbalances created by its growth model,'' Alan Holmer, Paulson's special envoy to China said today in a speech at Qinghua University in Beijing.

Bank of England Governor Mervyn King said he's increasingly concerned about currency market ``tensions'' and a potential drop in global stock prices. The refusal of China and other countries to allow their currencies to trade freely is ``a major concern and all of us will want to discuss it at the Group of 20 meeting this weekend,'' King told reporters in London.

Euro Bears Brunt

Adding to the irritation of European leaders is that the yuan's inflexibility means the euro is bearing the brunt of the dollar's slide to its weakest on a trade-weighted basis since the early 1970s. While the yuan has risen 5 percent against the dollar this year, it has fallen by the same magnitude versus the euro. The euro reached a record against the dollar last week.

Europe is ``bearing the burden of international adjustments on her shoulders alone,'' according to the briefing document, which was obtained by Bloomberg News.

Trichet said last week he opposes ``brutal'' currency moves. Until then, Trichet had stuck to the position of the Group of Seven industrialized nations, decrying ``excessive volatility'' in foreign exchange markets.

``The euro is at levels where exporters are feeling the pinch and there will be political pressure for something to be done,'' said Daragh Maher, senior currency strategist at Calyon in London. ``Whether it delivers anything remains to be seen.''

Possible Tariffs

The disparity in trade between China and Europe is already fanning tensions. The EU is investigating whether to impose tariffs on Chinese exports ranging from mandarin oranges to bolts amid accusations they are being sold in Europe below domestic prices or production costs, a practice known as dumping. European steelmakers are also asking regulators to tax steel imports from China.

``While the European authorities remain committed to free and open trade and investment flows, the Chinese authorities should take the appropriate measures to reduce imbalances and address the legitimate concerns coming from Europe,'' according to the confidential briefing paper.

People's Bank of China Deputy Governor Wu Xiaoling said last month that the government won't hurry to alter its currency system because doing so may hurt the economy.

Benefits Too

In a bid to soften Europe's message, the briefing document highlights how China would benefit from a stronger yuan after data released yesterday showed consumer prices rose 6.5 percent in October from a year earlier, matching the decade high of August.

``A faster appreciation'' of the yuan ``would help monetary policy to play a more active role'' in managing the Chinese economy, the European document said, noting it would also assist in reducing the country's trade surplus and an inflow of speculative capital.

A gain in the yuan would also ``facilitate an orderly appreciation of the currencies of a few other countries in Asia (including Japan),'' according to the briefing paper. ``The appreciation of these currencies would limit the negative impact of the renminbi appreciation on Chinese exports.'' The yuan is a denomination of the renminbi.

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Meera Louis in Brussels at mlouis1@bloomberg.net.

Last Updated: November 14, 2007 13:43 EST