Dow Jones tumbles after China raises bank reserves
THE Dow Jones industrial average closed down 45 points and commodity prices plunged yesterday after China's surprise decision to raise bank reserves, aggravating fears that it will no longer fund the global recovery.
China's central bank said that banks must hold 16.5pc of their deposits on reserve from February 25, up by 0.5pc.
The prospect of tighter lending and, as a result, reduced consumer spending in China, sent the industrial average down 152 points to 9,985.25 in early trading, while the Dow Jones UBS commodity index, made up of commodity futures, dropped by almost 1pc.
Oil fell almost 3pc to near $73 a barrel, while copper and gold also lost value yesterday amid concerns that China's voracious appetite for commodities could slow.
You-Na Park, an analyst at Commerzbank, said: "Financial markets are concerned that China's government could step too hard on the brakes."
Liquidity from the Chinese and US governments has played a huge role in capital markets' recovery from the financial crisis.
However, China has been reining in liquidity since the end of last year because it is nervous of fuelling inflation in its own economy. Its bank regulator pressed the country's banks to cut back lending and has already increased its reserve requirements once this year.
The central bank wants the country's lenders to advance 7.5 trillion yuan (€805bn) in loans this year, down from 9.6 trillion in 2009.
Yet 1.4 trillion yuan was lent in January alone, indicating that stronger measures were necessary.
The timing of the reserves announcement was a surprise, coming before the Chinese New Year, for which markets will close for a week.
Barry Knapp, US equities strategist at Barclays Capital, said: "It underscores the concern they have about inflation."
Consumer price inflation was at 1.5pc last month, down from 1.9pc in December.
Mr Knapp expected China to raise rates on government bonds after the holiday in the hope of stemming the flow of money into the country's economy.
However, he added that China would be unlikely to dampen its inflation risk properly until it allowed the yuan to appreciate.
David Chalupnik, head of equities at First American Funds, said that China was doing the right thing to avoid letting its economy grow so fast that inflation became a problem.
"We are very much intertwined with them because they do export so much to the US and we export to them as well," he said.
A 0.5pc rise in America's retail sales last month was not enough to counteract China's downward effect on Wall Street, a trend that was exacerbated by a disappointing 0.7 point drop in the Reuters/University of Michigan consumer sentiment index to 73.7 points in January.
Also yesterday, an International Monetary Fund paper proposed that central bankers are considering raising their inflation target to 4pc from 2pc, saying that the banks' ability to combat the financial crisis with monetary policy was hampered by their already-low interest rates. (© The Times, London)