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China May Reverse Tightening on Europe Debt, JF Says

Europe’s debt crisis will have a “ripple effect” globally and may force China to reverse its tightening policies, JF Asset Management’s Howard Wang said.

U.S. stocks tumbled the most in a year yesterday on concern Europe’s fiscal deficits will halt the global recovery. The selloff briefly erased more than $1 trillion in market value as the Dow Jones Industrial Average fell almost 1,000 points, a 9.2 percent plunge that was its biggest intraday percentage loss since 1987, before paring the drop.

“What we will likely see is the market forcing action by the European Central Bank and potentially, an earlier-than-expected unwind of Chinese tightening policies,” said Wang, head of the Greater China team at JF Asset, which oversees about $50 billion.

The benchmark Shanghai Composite Index has fallen 18 percent this year, making it Asia’s worst performer, as the government sought to unwind the stimulus and stepped up measures to prevent a housing bubble inflated by last year’s record loans.

European Central Bank policy makers met in Lisbon yesterday as investors looked to them to calm financial markets after the Greek bailout failed to assuage concerns about budget deficits from Portugal to Ireland. ECB President Jean-Claude Trichet resisted pressure from economists to consider buying government bonds to help relieve the fiscal crisis, telling reporters “we didn’t discuss the matter.”

Investors cut their holdings of European equity funds by more than $2 billion in the week to May 5, the biggest outflows in almost a year, amid concern Greece’s debt crisis would spread, according to EPFR Global.

‘Ripple Effects’

“There could be an economic ripple effect globally if this is not quickly contained,” said Wang, whose $3.3 billion China fund beat 82 percent of its peers over five years. “And as we saw two years ago, there’s a danger in underestimating these ripple effects.”

China’s economy slumped to the slowest pace of growth in almost 10 years in the first quarter last year, after a U.S. housing market collapse sparked a credit crunch and sent the world’s largest economy into recession. Chinese growth rebounded after the government implemented a 4 trillion yuan stimulus plan and banks lent an unprecedented 9.6 trillion yuan.

The central bank ordered lenders over the weekend to set aside more deposits as reserves for a third time in 2010. The government imposed a ban last month on loans for third-home purchases and raised mortgage rates and down-payment requirements for second-home purchases to curb housing prices.

Reverse Policies

China is likely to reverse policies cracking down on the property market because they will put the nation’s 8 percent economic growth target for this year at risk, Macquarie Securities Ltd. economist Paul Cavey said May 6.

A construction slowdown and a correction in property prices “seem inevitable” in coming months, Wang Tao, a Beijing-based economist at UBS AG, said in a note dated May 5.

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