Stocks, commodities hit by China bank move

High-yielding “commodity" currencies such as the Australian dollar also weakened after the move by the People’s Bank of China late on Tuesday, which appeared to be prompted by concerns that inflation could flare up if the economy overheated.

Oil prices also fell, with NYMEX crude futures down by more than $1 a barrel to below $80 on worries China’s move would dampen demand and after an industry group reported an unexpected increase in US distillate inventories.

But the yen strengthened on short-covering as investors unwound trades linked to a broad range of higher-yielding assets, while US Treasuries and Japanese government bonds also gained in response to weaker stocks.

A disappointing start to the US earnings season also weighed on investor sentiment with a profit warning from Chevron Corp following on the heels of weaker-than-expected results from aluminum maker Alcoa Inc The S&P 500 ended 0.9% lower overnight.

Fears that China is getting ready to use more forceful measures to cool the economy, including interest rate hikes, also pulled down US and European stocks on worries about a potential slowdown in Chinese demand, with exporters facing the brunt of the selling.

China’s vice minister of Housing and Urban-Rural Development Qi Ji said on Wednesday that property prices in China’s rich coastal cities were excessively high.

While China is stepping in to moderate its rapid economic growth, which has buoyed many of its Asian neighbours, many Western countries are still trying to stimulate demand.

But after their initial fall, most markets pared losses on expectations that China’s moves were targeted at soaking up excess liquidity in its financial system and were unlikely to derail a global economic recovery.

Even if it gradually raises interest rates, Beijing’s monetary policy is likely to remain largely loose and pro-growth for some time.

“We have had a pretty good start to the year and the markets are retracing a little bit at the moment," said Khiem Do, head of the Asia multi-asset group at Baring Asset Management, which oversees $50 billion.

“It will last for a few days and the market will climb back up again."

Khiem Do said Wednesday’s market move was reflective of the volatility that investors can expect in the year ahead as cental banks around the world gradually withdraw excess liquidity from their banking systems and contemplate interest rate hikes, unwinding emergency measures taken during the height of the global economic crisis.

The MSCI index of Asia Pacific stocks traded outside Japan was down 1.06% by mid-morning after earlier falling 1.2%. It had struck a 17-month high on Tuesday on optimism that a global recovery was gaining traction.

As commodity prices skidded, the index of materials stocks fell 1.7%.

The Thomson Reuters index of regional shares was down 0.17%.

Shanghai shares fell as much as 2.4% before paring losses, while Hong Kong’s Hang Seng index dropped 2%. Chinese banking and property stocks, the sectors likely to be most impacted by policy curbs, led both markets lower.

Japan’s Nikkei fell 0.9%, with exporters and resources firms weakened by the stronger yen and China’s attempts to lightly tap the brakes on the economy. Construction equipment maker Komatsu Ltd, which has seen Chinese sales soar, fell more than 2%.

Commodity-linked currencies such as the Australian and New Zealand dollar were also on the defensive following the moves by China -- a major importer of commodities.

Shanghai aluminium was down 3.4% after falling by its 5% daily limit and zinc recovered after coming close to its downside threshold. Copper dipped 2.2%, having earlier dropped as much as 4.4%.

The PBOC said it will increase commercial lenders’ reserve requirement ratios (RRR) by 50 basis points as of Jan 18, making China one of the largest economies to start rolling back policies used to combat the fallout from the global crisis.

The bank reserve increase followed two other tightening steps taken by the PBOC bank on Tuesday.

The central bank raised the yield on its regular sale of one-year bills by about 8 basis points, the first increase in 20 auctions and higher than forecasts for a rise of 4 basis points.

It also drained a record 200 billion yuan via 28-day bond repurchase agreements, ensuring it will draw net funds from the market this week.

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