China rate hike fears hit stock markets

[January 20, 2011]  LONDON (AP) -- Fears that China will tighten its monetary policy hit stock markets Thursday ahead of another batch of U.S. corporate earnings statements.

The news that China's economy grew by 9.8 percent in the fourth quarter of 2010, up from 9.6 percent in the previous three-month period, fueled speculation that the monetary authorities will have to do more to cool the economy and ease inflationary pressures.

Though separate figures showed that inflation did drop in December to 4.6 percent from the 28-month high of 5.1 percent the month before, price rises remain stubbornly high and could pose a danger to the Chinese economy if left unchecked.

The December figures mean that inflation averaged 3.3 percent for 2010.

"Policymakers are behind the curve and need to act decisively if they are to curb inflation," said Diana Choyleva, an analyst at Lombard Street Research. "The longer growth stays above trend, the worse the necessary downswing is set to be. China's violent cycle could be highly destabilising for the world."

The Chinese data spooked investors that the world's second-largest economy -- the main engine of growth in the world economy over the last few years -- will have to see growth moderate to get inflation levels down.

China has already moved towards tighter monetary policy. In the past four months, it has raised interest rates twice. And last week, the central bank raised the amount of money banks must keep on reserve for the seventh time in a year, which put the rate for major banks at 19.5 percent.

Unsurprisingly Chinese shares took the brunt of the selling. The benchmark Shanghai Composite Index dived 2.9 percent to 2,677.65. The Shenzhen Composite Index for China's smaller, second market slid 3.4 percent to 1,170.47.

Japan's Nikkei 225 stock average closed down 1.1 percent at 10,437.31 while Hong Kong's Hang Seng index shed 1.7 percent to 24,003.70. South Korea's Kospi lost 0.4 percent to 2,106.66, a day after finishing at a new record high of 2,115.69.

The selling pressure persisted into the European session. The FTSE 100 index of leading British share was down 0.9 percent at 5,924.81 while Germany's DAX fell 0.4 percent to 7,056.18. The CAC-40 in France was only down 6 points at 3,970.

Wall Street was headed for a subdued opening, too -- Dow futures were down 7 points to 11,779 while the broader Standard & Poor's 500 futures were flat at 1,278.50.

The focus later in the U.S. will be on the next raft of U.S. earnings statements, from the likes of Morgan Stanley and Google, though there will be some interest in the weekly jobless claims numbers as well as the latest figures on existing home sales.

In the currency markets, the euro remained buoyed against the dollar, trading flat over the day around the $1.3480 level. Europe's single currency struck a near two-month high Wednesday of $1.3538 amid mounting hopes that policymakers are finally getting a handle on the debt crisis following a year of crisis management.

However, a report that Germany was planning for a restructuring of bailed-out Greece's debt -- later denied by Germany -- was a timely reminder that the market remains tense and that the crisis will not fade quickly.

The dollar was up 0.2 percent at 82.16 yen.

Benchmark crude for March delivery was down 14 cents at $90.72 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost 50 cents to settle at $91.81 on Wednesday.

[Associated Press; By PAN PYLAS]

Pamela Sampson in Bangkok contributed to this report.

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