New China bank rules weigh on world markets

[November 10, 2010]  LONDON (AP) -- World markets mostly fell Wednesday after China's central bank announced it will raise the amount of cash that banks have to hold in reserve and the country's leading credit rating agency lowered its view on the U.S. in the wake of the Federal Reserve's decision to pump another $600 billion into the U.S. economy.

In Europe, the FTSE 100 index of leading British shares was down 28.36 points, or 0.5 percent, at 5,846.83 while Germany's DAX fell 31.76 points, or 0.5 percent, at 6,756.05. The CAC-40 in France was 27.23 points, or 0.7 percent, lower at 3,918.48.

Wall Street was poised to drop modestly again at the open later -- Dow futures were down 4 points at 11,309 while the broader Standard & Poor's 500 futures fell less than a point to 1,210.60.

China was the epicenter of newsflow Wednesday, a day before the leaders of the Group of 20 industrial and developing countries gather in South Korea's capital Seoul. The artificially low level of China's currency, the yuan, is likely to be one of the main topics of discussion during the two-day meeting.

Investors are concerned that the decision by the People's Bank of China to raise the reserve ratio requirements of banks by half a percentage point -- to cool lending, particularly in the overheated real estate market -- from next Monday will be the first in a series of tightening measures.

A day ahead of inflation figures and the G-20 meeting, there are growing concerns in the markets that China is preparing to tighten policy further to dampen down on price pressures and rein in sky-high growth levels.

"The timing may well be an indication of plans for more substantial tightening in an attempt to slow economic growth," said Derek Halpenny, an analyst at the Bank of Tokyo-Mitsubishi UFJ.

China's Shanghai Composite Index fell 0.6 percent to 3,115.36.

Further jitters were stoked by the news that the country's credit rating agency Dagong downgraded the long term sovereign rating of the U.S. to A-plus from AA. That was the second time in six months that Dagong has downgraded its rating on the U.S. and comes after China's central bank chief Zhou Xiaochuan said the Fed's new money-boosting measures may hurt the rest of the world.

As well as dishing out criticisms, China will see likely a fair chunk thrown its way too at the G-20 meeting.

In particular, the country's monetary authorities will likely face criticism, most notably from President Barack Obama, that its policy of keeping the yuan low to boost exports is causing problems in the world economy. Ahead of the meeting, the Chinese monetary authorities have allowed the yuan to rise modestly against the dollar in Wednesday's daily fixing.

Figures earlier showed how much China's exporters are gaining from the artificially low currency, as the country posted its second-highest trade surplus this year in October -- the $27.1 billion surplus was up sharply over September's $16.9 billion and just behind the year's high in July of $28.7 billion.

"Ahead of tomorrow's G-20 summit, China's trade surplus will continue to keep the focus on the controversial subject of trade imbalances and reform of the international monetary system," said Neil MacKinnon, global macro strategist at VTB Capital. "There is no doubt that currency tensions arising from the weakness in the dollar will be high on the agenda."

Even without the developments in China, many analysts said the lackluster performance this week was inevitable as stocks have enjoyed big gains in recent weeks on expectations that the Federal Reserve would be pumping more money into the U.S. economy. Its decision last week to buy up $600 billion of assets sent many of the world's major stock indexes up to their highest levels since September 2008, when U.S. investment bank Lehman Brothers collapsed and set in motion a chain of events that led to the deepest and longest global economic recession since World War 2.

"It does now seem as if a spate of profit taking could now be on the cards, not least given the relatively uneventful economic calendar that we have in the coming days ahead of the expected news from the G-20 meeting," said Chris Weston, research analyst at IG Markets.

The other main focus in the markets ahead of the G-20 meeting is the resurfacing of Europe's government debt crisis in Ireland -- the country's borrowing costs are rising in the markets on a daily basis amid fears that the government will not be able to push through its next round of austerity measures and will be forced to seek help from its partners in the eurozone.

The euro was down 0.1 percent on the day at $1.3759, way down on last Friday's multi-month high of $1.4257.

Earlier in Asia, Japan's benchmark Nikkei 225 stock average was the best performer in Asia, closing up 136.03, or 1.4 percent, at 9,830.52 as the dollar rose to near 82 yen, giving exporters some respite from a strong Japanese currency. By mid morning London time, the dollar was 0.2 percent higher on the day at 81.88 yen.

South Korea's Kospi added 1.1 percent to 1,967.85 and Australia's S&P/ASX 200 fell 0.9 percent to 4,699.80.

Benchmark oil for December delivery was up 6 cents at $86.78 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

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