As expected, Asian shares fell yesterday in the wake of China’s surprise rate rise.
It was the fourth negative day for markets in the region.
Not only was China’s rate rise a big story, but also news that the Japanese government now thinks the economy has slowed to a standstill.
The MSCI Asia Pacific Index lost 1% at one stage, led by a drop in the shares of commodity producers and some real estate developers, especially in China.
The worry is that the 0.25% rate rise by China, the first since December 2007, will hit demand for raw materials by the world’s biggest energy consumer.
Japan’s Nikkei Stock Average fell 2.2% at one stage, but ended off 1.6%; Australia’s ASX 200 was down 1.3%, but that was halved.
Other markets saw a similar reaction with a rebound in later trading after the earlier weakness.
European and US markets bounced back last night, as did copper, oil and other commodities. Gold was a little more circumspect, rising $US10 to trade around $US1346, still well down from the highs at the start of the week of well over $US1370 an ounce.
Chinese stocks fell, as property shares came under early selling pressure. The Shanghai market dropped 2.2% in early trading, but rebounded quite noticeably to move into the black at the mid session break to be slightly higher at the close.
The Shanghai market is up more than 28% since the July 5 low, but still down by almost 9% over the year so far.
In currency markets, the Chinese currency fell the most in four months following the rate hike.
The currency lost around 0.2%. The currency has gained only 2.5% since Beijing ended the two-year peg against the greenback on June 19.
The rationale for the surprise increase is the concern about inflation and continuing strong growth in housing and bank lending.
The over-lending last month (and punishment of six banks last week), has loomed large in some commentary as signs of a crackdown.
The government also last week tightened further controls on buying second and third homes, increasing the cost and restricting purchases.
Much of the extra lending could have come from the estimated $US90 to $US100 billion of additional hot money that found its way into China in the third quarter’s massive $US194 billion boost to the country’s foreign exchange reserves.
Analysts now point to the faster than expected growth in housing prices from August to September and jump in September bank loans which saw the total come in at 596 billion Yuan, against forecasts of 500 billion.
The lending has helped keep asset prices growing (while the growth rate slows, it is still a strong 9.1% rise for all houses in the year to September).
Some analysts say the lift in the key deposit rate may lessen the attraction of low interest but instant access deposits which have been used to fund house and stockmarket purchase and force them to invest in more stable time deposits.
The Chinese government has allowed the currency to drift higher, but won’t be following the Singapore central bank and telling the market that the rate will rise, as it did late last week in the second tightening of monetary policy this year in the island state.
A quicker way may have been to allow the Yuan to appreciate more quickly in the name of economic and external policies (i.e. calming the mad Americans intent on damaging China’s trade interests). It would have helped settle external concerns (and also pleased the likes of Japan and China) and made some impact internally.
The rate rise comes ahead of this weekend’s meeting of finance leaders from the Group of 20 developed and emerging nations in South Korea.
It is expected to be overshadowed by a dispute between China and the US over the valuation of the Yuan and growing fears of protectionist currency wars, led by the Fed’s approaching big spending binge.
The Chinese move knocked the Tokyo stockmarket lower by more than 2% at one stage yesterday in a rude reminder that the world’s third biggest economy is now beholden to the world’s second (and less developed) economy.
But there was also some impact from the gloomy outlook for the economy from the government which included the first downgrade in its assessment for nearly two years.
Japan’s cabinet office issues these outlooks and the latest one, released late Tuesday, said the country’s recovery from its worst post-war recession appeared to be “pausing”.
The outlook warned that the economy could soon face weaker overseas demand.
“The risks that the economy [could be] depressed by a possible slowdown in overseas economies, and fluctuations in exchange rates and stock prices are increasing,” the report said.
While not a great surprise, given the rise in the value of the yen, the talk about Japanese companies moving offshore (and support for that investment in the latest stimulus plan now being put together) and the additional easing measures from the country’s central bank, the fact that it was issued tells us the gloom is widespread in Japan’s business and political establishments.
Industrial production has lost its momentum, in turn export growth is slowing, orders are weakening and deflation won’t go away.
The Cabinet Office report contradicted the assessment in September’s outlook which said the economy was "picking up". No longer, it is "pausing" (which was al
