Tightening in China to Be `Less Aggressive' on Europe Woes, UBS's Pu Says

China’s policy makers may be “less aggressive” in introducing further tightening measures as Europe’s sovereign-debt problem spreads and risk to the economy grows, UBS AG’s wealth management unit said.

The European crisis as well as falling commodity prices mean China may only raise interest rates once this year, compared with an earlier prediction of as many as three times, Pu Yonghao, chief Asian investment strategist at UBS Wealth Management, said in an interview today. Expansion of China’s gross domestic product may slow to about 9 percent in the second half from some 11 percent in the first six months, he said.

“The European crisis means commodity prices are coming down, the European Central Bank and Fed may postpone their tightening schedule and of course, exports to Europe may be reduced,” Pu said in UBS’s offices in Singapore. “The tightening will be reconsidered and they may have to adopt less aggressive policies.”

UBS joins BNP Paribas and AMP Capital Investors this month in saying China may rein in tightening measures amid increasing concern European nations from Greece to Spain and Portugal may default on debt. Europe is China’s biggest export destination, making up 20 percent of its total overseas sales.

China is one of the world’s worst-performing stock markets this year as policy makers raised bank reserve requirements and stepped up curbs on property speculation. The MSCI China Index has dropped 13 percent, while the Shanghai Composite Index has lost 20 percent.

‘Easing Up’

The government may postpone an increase in borrowing costs until the third quarter, BNP Paribas analysts Chen Xingdong and Isaac Meng said on May 21. Shane Oliver, Sydney-based head of investment strategy at AMP Capital, said it’s increasingly likely the Chinese authorities will start thinking about “easing up on the brake.”

Further curbs on the real estate market may still be in store, including a tax on property purchases, UBS’s Pu said. Residential and commercial real-estate prices in 70 cities rose last month even after the government increased down-payment requirements for second homes and banned loans for third-home purchases.

A property tax “will provide more or less a permanent base for local governments to source for more financing while at the same time cooling down speculative demand,” the strategist said. Still, a “collapse” in property prices is “unlikely,” he said.

Energy shares may be among the best bets in China over the next three to six months given the nation’s demand for fuels and more attractive valuations following the “severe correction” in share prices, Pu said. He also favors industrial shares given the outlook for capital spending.

Energy Slump

An index tracking 23 Chinese energy producers has plunged 28 percent this year, the most among the CSI 300 Index’s 10 industry groups.

Pu said on March 12 share prices across Asia may decline a further 10 percent to 15 percent before staging a rebound. The MSCI Asia-Pacific excluding Japan Index had dropped 15 percent through yesterday and gained as much as 1.3 percent today.

UBS’s wealth management and Swiss bank had about $907 billion of total invested assets as of December, while its U.S. wealth management unit oversaw $652 billion.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net