Reserve hike by Chinese rattles global investors

Finance

Published: 13 Jan. 2010, 20:47

Reserve hike by Chinese rattles global investors

The Chinese government’s decision to raise its yuan reserve requirement for banks rattled global financial markets yesterday, pummeling Korea’s benchmark Kospi to the lowest level in more than three weeks and sharply hitting share prices of major exporters to China. But analysts said the latest move by Beijing, aimed at staving off inflation stemming from a massive liquidity influx at home and overseas, is unlikely to weaken Korea’s strong growth and financial markets in the long term.

They predicted the action would instead curb growing concern about potential hazards of inflationary pressure, and indicates Beijing’s confidence that China’s rapid growth is strong enough to withstand potential fallout from a policy of fiscal tightening.

Seoul’s benchmark Kospi shed 27.23 points, or 1.6 percent, to close at 1,671.41 yesterday, the lowest level since Dec. 23 when it closed at 1,661.35. The decline came after the Dow Jones industrial average lost more than 0.3 percent and European markets shed more than 1 percent.

The Chinese central bank said yesterday it would increase commercial lenders’ reserve requirement ratio by 0.5 percentage points as of Jan. 18, making itself one of the latest economies to start scaling back expansionary policies embraced in the wake of the recent economic downturn. The move sparked concern that China’s massive purchases of natural resources, commodities and other raw materials from overseas may slow down.

Such concern was evident in Seoul yesterday. Share prices of Korean steelmakers and chemical companies, largely relying on exports to China, experienced significant weakening. Posco, Korea’s largest steel company, slid 4.49 percent to close at 596,000 won, while smaller Dongkuk Steel lost 5.29 percent to close at 25,050. Chemical behemoths like Hanwha Chemical and LG Chem shed 6.71 percent and 2.26 percent, respectively.

“Investors have been waiting for a long time for a signal that China will begin exit measures taken during the downturn,” said Oh Jae-yul, stock market analyst for IBK Investment & Securities. “The earlier-than-expected increase in reserve requirement will certainly put an emotional burden on the stock markets given that it can be translated as the precursors of more exit measures to come.”

But analysts said the latest move would unlikely hamper the market sentiment for long. “The Chinese economy would be able to achieve an annual growth of 10 percent for 2010 despite the reserve requirement change, meaning the change will hardly damage Korean exporters’ sales,” said Lim No-joong, analyst at Solomon Investment & Securities.

The tightened reserve requirement also means that China’s liquidity would be reduced to near “normal levels,” which bodes well for the health of that nation’s credit situation, said Yoon Chang-yong, economist at IBK Investment & Securities.

By Jung Ha-won [hawon@joongang.co.kr]

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