The world is finally waking up to the fact that inflation is getting to be a wee bit of a problem and inflation is very unkind to investments.
Confidence in China may be fragile, since the stock market reaction seems well out of proportion to the significance of the so-called tightening via a 1% increase in bank reserve requirements (the last increase took place May 12). Michael Pettis had taken exception to the notion that this move would have much impact on inflation, since China’s “extremely loose” monetary can be corrected only by letting the currency appreciate sufficiently. But the government assertion that this indeed constituted real tightening was sufficient to spook investors.
From the Wall Street Journal:
Asian markets traded broadly lower Tuesday, led down by Shanghai and Hong Kong, where banking and property shares fronted declines as investors fretted about the impact of the latest round of anti-inflationary measures announced over the weekend.
Shanghai’s Composite Index plunged 7.7% to 3072.33 in the first day of trading since the People’s Bank of China announced it would lift the ratio of reserves banks must set aside as deposits by one percentage point. The measure was aimed at easing inflation that is at 12-year highs without unduly slowing the dynamic economic growth needed to create jobs….The benchmark index for the Shenzhen stock market plummeted 8% to 928.20.
“Right now I am advising investors to stand well back unless they are already short,” said Ben Collett, head of hedge fund sales trading at Daiwa Securities SMBC in Hong Kong. “We have more work to do on the downside.”
Investors in mainland China dumped bank and property shares. Shanghai Pudong Development Bank dropped by the daily 10% limit and property developer China Vanke also tumbled 10%. Airlines like Air China also fell back on worries over high oil prices, which raise operating costs.
“It’s the second time in a month that the reserve-requirement ratio was raised and this deeply worries investors. The market is too weak to resist any bad news,” said Wei Daoke, an analyst with Shenyin Wanguo Securities in Shanghai.
Mainland China’s pain spread to Hong Kong, where the Hang Seng Index slipped 3.97% at 23433.65. China Netcom lost more than 8%, while its soon-to-be parent, China Unicom, shed more than 7%.
Japanese shares also declined. The Nikkei 225 Stock Average fell 160.21 points, or 1.1%, to close at 14021.17.
Unlike the end of February 2007, where a rout in China kicked off a global fall, the plunge in China is not precipitating large declines elsewhere. However, stocks are broadly down in other markets based on the same sort of inflationary worries that are rattling Chinese investors. From Bloomberg:
Stocks fell in Europe and Asia, and U.S. index futures declined, on concern central banks will have to raise borrowing costs to combat inflation as the economy slows. Shares in China plunged the most since February 2007.
ABB Ltd. and Bank of America Corp. retreated in Europe after U.S. Federal Reserve Chairman Ben S. Bernanke said policy makers will “strongly resist” a surge in inflation expectations…
Inflation “is the most worrying thing,” said Jane Coffey, head of equities at Royal London Asset Management, which has the equivalent of $63 billion in assets under management. “We were expecting the economy to slow and that we had to adjust earnings estimates, but we always thought that you would get continued central banks’ easing. Even Bernanke was talking quite hawkish.”
The MSCI World Index lost 1 percent to 1,474.21 at 10:53 a.m. in London as all 10 industry groups decreased. Futures on the Standard & Poor’s 500 Index fell 0.7 percent. China’s CSI 300 Index retreated 8.1 percent to a 14-month low.