China may reverse tightening on Europe debt ripples, JF says

U.S. stocks tumbled the most in a year Thursday on concern Europe's fiscal deficits will halt the global recovery.

The selloff briefly erased more than US$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 US$50 billion.

The benchmark Shanghai Composite Index has slumped 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. The index fell 1.4 percent to 2,700.97 at 10:27 a.m. local time.

European Central Bank policy makers met in Lisbon Thursday 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 US$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.

“There could be an economic ripple effect globally if this is not quickly contained,” said Wang, whose US$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.

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