UK: Global market turbulence continues

The London Stock Exchange in Paternoster Square. Turbulence on global stock markets continued today

The London Stock Exchange in Paternoster Square. Turbulence on global stock markets continued today as an unfolding credit crunch in China sent lending rates soaring in the worlds second-biggest economy. - Credit: PA

Turbulence on global stock markets continued today as an unfolding credit crunch in China sent lending rates soaring in the world’s second-biggest economy.

The London market has endured heavy falls in recent weeks, as squeezed lending in China compounds falls triggered by America’s plan to phase out economic stimulus.

The FTSE 100 Index was 1.4% in the red today, down 85 points to 6031.9, after enduring its fifth consecutive week of falls last week.

Global stock markets also reacted nervously, with the Hang Seng index in Hong Kong closing down 2.2% and Japan’s Nikkei falling 1.3%. Germany’s Dax and France’s Cac 40 were also sharply lower.

Lending rates between banks in China have soared as high as 13.4% in recent days as the country’s central bank attempts to reduce banks’ reliance on credit under plans to rebalance its economy.

The People’s Bank of China has refused to pour new funds into the economy, and today insisted credit conditions in the country remain “reasonable”.

Instead it urged banks to “prudently manage liquidity risks that have resulted from rapid credit expansion” by holding back the pace of loans.

Most Read

Surging lending rates between Chinese banks, which have settled down to around 10%, are part of the country’s clamp-down on so-called “shadow banking” - where non-bank investment firms and state organisations lend to each other.

China is attempting to rebalance its rapidly-growing economy away from credit-fuelled growth and on to a more sustainable path driven by domestic demand.

Chinese investment has been around half of the country’s gross domestic product (GDP) in recent years as the country embarked on a massive debt-funded building programme, which helped send global commodity prices soaring.

Ratings agency Moody’s said the lending squeeze has “positive intent but entails risks”.

It said it reflects a “conscious decision by the central bank not to accommodate money markets at a time of seasonal tightness as a means to curb China’s credit growth”.

Moody’s added: “We think it is prudent for China to curb its credit growth to more sustainable levels in order to prevent a build-up of excessive leverage.”

But it warned this could result in higher bad debts and lower profits for smaller Chinese banks, threatening their safety and depriving firms of credit.

However, experts added China’s controlled lending squeeze is different from the 2007/08 credit crunch, which saw a huge tide of toxic home loans in the United States erode Western banks’ balance sheets and send inter-bank lending rates soaring.

That led to the collapse of banks including Lehman Brothers, Northern Rock and Bradford & Bingley, triggering five years of economic gloom across developed economies.

Kathleen Brooks, UK research director at Forex.com, said: “Chinese banks have the capital buffers to withstand under-performing loan losses, and if loans are called in early then consumers have assets to pay them back.

“However, de-leveraging is painful, as we know in the West, and this could dent China’s growth outlook for the rest of this year, threatening global growth prospects.”

China’s booming growth has eased in recent years, falling to 7.7% in the first quarter of the year.

Recent turbulence has wiped out gains made by the London market this year and is in stark contrast with a just month ago, when markets were booming on stimulus-induced highs.

In May the FTSE 100 threatened to beat its highest close of 6930.2 points, set in 1999 during the dotcom boom, while markets in the US and Europe hit record highs.

But plans by the US Federal Reserve to taper its vast quantitative easing drive - due to an improving American economy - have undermined markets since then.