World stock markets plunged yesterday amid fears that China, nervous about inflation, has put a plug in the liquidity that has been fuelling the economic recovery.
The FTSE 100 closed down 1.6 per cent at 5,420.80 points as mining companies bore the brunt of concerns that global growth would slacken again without Chinese support. The CAC 40 in Paris and the Zurich and Italian bourses lost between 0.7 and 2.2 per cent, while markets in South Africa and Tokyo fell slightly. China’s Shanghai Composite index lost 2.9 per cent.
Anthony Grech, market strategist at IG Index in London, blamed the fall in shares on news that China had told its banks to stop lending, in the wake of poor housing figures and bank losses in the United States. “Attempts by Chinese authorities to temper lending levels and prevent overheating in the economy are being regarded with dismay by companies with a stake in the nation’s recovery,” he said.
Liu Mingkang, chairman of the China Banking Regulatory Commission, scared investors yesterday with comments about the need to stop asset bubbles being created out of too much easy credit. He said that Chinese banks were expected to cut lending in 2010 to 7.5 trillion yuan (£675 billion), down from 9.5 trillion yuan last year, with total loans outstanding up 18 per cent year-on-year, down from 32 per cent in 2009.
He added that all banks had been ordered to increase their reserves and cut back on risky loans.
Advertisement
Reportedly, the People’s Bank of China and the Bank of China have already put into place the restrictions demanded by the regulator.
However, other countries have been relying on China to continue spending to aid their own economic recoveries, as banks in the US and Europe remain reluctant to lend to consumers or businesses.
Meanwhile, economists have warned that a halt in Chinese lending would rob the global economy of its only large source of liquidity.
The news from China combined with disappointing numbers on housing starts and mediocre bank results to send American markets down from a 15-month high to what looked like their worst day so far this year. By mid-afternoon the Dow Jones industrial average was down 1.5 per cent at 10,565.14 points, the broader S&P 500 was down 1.44 per cent and the Nasdaq was lagging by 1.69 per cent.
Morgan Stanley and Bank of America both reported full-year losses yesterday, adding to disappointment news from IBM, which said on Tuesday evening that sales were up by only 1 per cent in the fourth quarter.
Advertisement
The US Commerce Department said that construction of new homes had fallen unexpectedly in December, suggesting that homebuilders did not have the confidence or capital to ramp up developments. Construction started on 557,000 new homes in December, a 4 per cent decline from November’s revised figure of 580,000.