China policy tightening weighs on world markets

[November 19, 2010]  LONDON (AP) -- Stock markets drifted lower Friday after China took further steps to rein in lending and amid worries that a financial rescue package for Ireland is proving more difficult to agree than expected.

In Europe, the FTSE 100 index of leading British shares was down 52.04 points, or 0.9 percent, at 5,716.67 while Germany's DAX fell 9.98 points, or 0.2 percent, to 6,822.13. The CAC-40 in France was 8.87 points, or 0.2 percent, lower at 3,859.10.

U.S. stocks were also poised for a modest pullback -- Dow futures were down 24 points, or 0.2 percent, at 11,152 while the broader Standard & Poor's 500 futures fell 2.9 points, or 0.2 percent, to 1,194.80.

Weighing on sentiment was the news that China's monetary authorities have ordered its banks to hold back more money as reserves in a new move to curb lending and cool inflation.

That was the second reserve increase in two weeks and came as Beijing tries to restore normal financial conditions and curb inflation, which rose to a 25-month high of 4.4 percent last month.

The central bank ordered lenders to set aside an additional 0.5 percent of their deposits, with effect from November 29.

The worry in stock markets is that tighter Chinese monetary policy will dent growth prospects. That's important because China is now the world's second largest economy.

The decision was announced after Chinese stock markets had closed higher following a fairly torrid few days, which has seen the country's major indexes shed around 10 percent of their value, largely on concerns of tighter Chinese policy.

The benchmark Shanghai Composite Index rose 22.15 points, or 0.8 percent, to 2,887.60. The Shenzhen Composite Index for China's smaller, second exchange climbed 2.9 percent to 1,297.48.

U.S. Federal Reserve chairman Ben Bernanke took a swipe at China in his keynote speech at a banking conference in Frankfurt, Germany, arguing that the country's inflexible currency regime, which has the yuan effectively pegged at a low rate against the dollar, is preventing a much-needed rebalancing of growth in the global economy.

Bernanke has faced a barrage of criticism over the past couple of weeks, both in and out of the U.S., after the Fed decided to pump another $600 billion into the U.S. economy, in effect to get unemployment down.

His argument, which has many backers in the international community, is that the U.S. needs to export more and consume less, while China needs to do the opposite.

Investors are also keeping a close watch on developments in Dublin to see if a bailout package for Ireland emerges following discussions between the Irish government and representatives from the European Union, the International Monetary Fund and the European Central Bank.

Speculation that a financial bailout package that could run up to euro100 billion will be agreed had increased Thursday after leading Irish officials, including the country's leading central bank and the finance minister, hinted that a rescue deal was in the offing.

However, investors are concerned that a standoff is developing between Ireland and its partners in the eurozone, notably Germany and France over Ireland's exceptionally low level of corporate tax.

The worry in the markets is that the Irish government's apparent refusal to consider changes its 12.5 percent tax rate will prevent a deal from being agreed soon.

"Traders seem exceptionally wary of the path ahead and with various spats looming, such as questions over the country's incredibly low corporation tax rates, the debate could drag on for some time yet," said Anthony Grech, head of research at IG Index.

Elsewhere in Asia, Japan's benchmark Nikkei 225 stock average gained 0.1 percent to close at 10,022.39 and South Korea's Kospi added 0.7 percent to 1,940.96. Australia's S&P/ASX 200 was 0.2 percent lower at 4,629.2, and Hong Kong's Hang Seng fell 0.1 percent at 23,605.71.

In the currency markets, the euro continued its recent recovery, trading 0.5 percent higher on the day at $1.3717 while the dollar fell 0.4 percent to 83.18 yen.

Benchmark oil for December delivery was up 62 cents to $82.47 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

Associated Press writer Pamela Sampson in Bangkok contributed to this report.

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