China May Hold Off Interest Rate, Yuan Moves on European Crisis

China may ease tightening measures as the deepening European crisis threatens global growth, AMP Capital Investors and BNP Paribas said, while BofA Merrill Lynch Global Research predicted a delay in the yuan’s revaluation.

The government may postpone an increase in borrowing costs until the third quarter after raising mortgage rates and down payments to curb record gains in home prices, BNP said. The central bank this month ordered lenders to set aside more funds as reserves for a third time in 2010 to prevent asset bubbles.

“We understand that Chinese policy makers 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.”

China’s Shanghai Composite Index has fallen 5.6 percent this week on concern the European crisis may slow China’s exports to a market that makes up more than a fifth of its overseas sales. The gauge has lost 22 percent this year after entering a bear market last week, the first among the world’s 10 biggest exchanges in 2010.

“It’s too early to say the falls are over, but we see it as part of a correction,” Shane Oliver, Sydney-based head of investment strategy at AMP Capital, which oversees about $90 billion, said in e-mailed comments. “It’s increasingly likely the Chinese authorities will be starting to think about easing up on the brake.”


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 overseas sales.

China Cosco Holdings Co., the nation’s largest shipping company, has slumped 30 percent from this year’s high in January. Guangzhou Shipyard International Co., which relies on Europe for more than 90 percent of sales, tumbled 25 percent.

“While attention is heavily focused on Europe, China might be gradually getting a whole lot worse,” said Emil Wolter, head of Asian regional strategy at Royal Bank of Scotland Group Plc. “This is not a done deal but frankly this is now the big black swan from a global demand perspective.”

A weeklong rout in global stocks deepened yesterday on concern that European governments are divided on resolving financial turmoil in the region. Uncoordinated attempts by European policy makers to resolve the region’s debt crisis have unnerved investors. France, the Netherlands and Finland said they have no plans to follow German Chancellor Angela Merkel’s effort to control what she called “destructive” markets by restricting short selling.

Rate Increases

Standard & Poor’s 500 Index plunged the most in 13 months, tumbling 3.9 percent, after U.S. jobless claims rose by 25,000 to 471,000 in the week ended May 15, exceeding the median forecast of economists surveyed by Bloomberg News.

China may hold off interest-rate increases until the second half or next year as growth slows, the state-run China Securities Journal newspaper said in a front-page editorial yesterday. Exports to Europe may also slow by six to seven percentage points in May, June, and in the third quarter 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.

“In the short term, the government doesn’t want to raise rates,” Citic Securities Chief Strategist Yu Jun said today. “The risk of the Chinese economy slowing is too great.”

Reviewing Forecast

The debt crisis also prompted Standard Chartered Plc to review its forecast for an appreciation in the yuan this month. 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.

“We are pushing back our call for the renminbi to exit the de facto U.S. dollar peg from this summer to the end of the year,” Merrill said in a report today, forecasting the yuan to trade at 6.80 to the dollar by the end of 2010.

The U.S. and China’s biggest trading partners have asked for a revaluation of the yuan for a level-playing field for exports. China won’t succumb to external pressure and will modify the currency based on the economic situation, Assistant Finance Minister Zhu Guangyao said in Beijing yesterday.

The country won’t make a “meaningful” commitment on the yuan, Market News International reported today, citing an unidentified People’s Bank of China official.

“Clearly, for now the timing of a yuan revaluation has been pushed back,” said Thomas Harr, a currency strategist at Standard Chartered in Singapore. “The yuan’s nominal exchange rate has dropped and there is a lot less rationale for China to appreciate now” after the decline in the euro and other Asian currencies.

BNP forecast a “limited” rate increase late in the third quarter, while a revaluation of the yuan is “increasingly unlikely.” The Australia and New Zealand Banking Group Ltd. said China may remain “cautious” on its currency policies and may delay any move on the yuan until at least late June.

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