China credit tightening drags down Wall Street

08:42, January 21, 2010

The Dow suffered its worst drop of 2010 on Wednesday as U.S. stocks succumbed to increasing fears that China's curbs on bank lending might affect a nascent global economic recovery, traders said.

Rumors have run in the past days that Beijing allegedly ordered its majir banks to curb lending over the rest of this month after an early burst of credit. On Wednesday, a Hong Kong radio program quoted a Chinese banker as saying the People's Bank of China reportedly had decided to raise the benchmark interest rates as soon as this Friday.

The news sent Chinese stocks in Shanghai and Hong Kong into a dive.

When the Wall Street opened, signals that China may restrain its economic expansion hurt shares of natural resource companies including Alcoa and big manufacturers like Caterpillar.

The Dow Jones industrial average tumbled 122.28 points, or 1.14 percent, to end at 10,603.15. The Standard & Poor's 500 Index fell 12.19 points, or 1.06 percent, to finish at 1,138.04. The Nasdaq Composite Index dropped 29.15 points, or 1.26 percent, to close at 2,291.25.

"This is really a direct result of concerns around the tightening of credit in China," Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey, was quoted by the Associated Press as saying.

Chinese stocks tumbled by 3 percent Wednesday, as jittery investors dumped shares on rumors that the country's central bank is to raise interest rate by 0.27 percentage points.

The People's Bank of China, the central bank, tightened lending by raising commercial banks' reserve ratio requirements, and increasing the auction yield on its one-year bills. The incremental measures, aimed to drain liquidity from the banking system and head off possible inflationary pressures, have sent the country's two stock markets to a tailspin.

At closing Wednesday, the Shanghai composite stock index dived 95.02 points, or 2.93 percent, to end at 3151.85. The Shenzhen stock index tumbled 434.52 points, or 3.25 percent, and closed at 12916.15 points.

Chinese Premier Wen Jiabao Tuesday told a cabinet meeting that China would take steps to deal with inflationary expectations.

"China will maintain reasonable growth in money supply and credit, focus on optimizing the credit structure and carefully manage the pace of lending to reduce financial risks," Wen said.

Investors count on emerging economies like China to underpin a nascent global recovery, so any restrictive policy could be a setback for those investors who bet on a sustainable rebound, analysts said.

People's Daily Online