Risk assets, including U.S. stocks and commodities, took a big hit today as investors reacted to China signaling they intend to "prick" a speculative property bubble. Chinese bank regulators are telling some banks to cut back on property loans after pumping a record 9.6 trillion renminbi (US$1.4 trillion) in new loans during 2009.
In a press conference, Chairman of the China Banking Regulatory Commission, Liu Mingkang said China will set curbs on demand drivers of credit. He indicated Chinese government bank regulators will carefully monitor loans for real estate and local governments. Mr. Liu also indicated banks are projected to extend 7.5 trillion renminbi, (US$1.1 trillion) in loans this year which is down nearly 22 percent from last year’s record amount.
The Shanghai Shenzen dropped 3.2 percent today and the Hang Seng fell 1.8 percent.
In the United States, stocks were down sharply with the S&P 500 index down 1.06 percent and the NASDAQ down 1.26 percent.
The U.S. dollar strengthened as well, boosted by China pressuring lenders to cut back and on data showing benign inflation and a rise in housing permits. The U.S. dollar index, which tracks the dollar's performance against a trade-weighted basket of six major currencies, jumped over 1.1 percent to 78.34, up from 77.451. The dollar also got a lift from a weaker euro as Greece continues to face a fiscal crisis placing pressure on the euro.
Commodities were weaker on the flurry of positive news for the greenback. Major sector ETF losers today include commodity plays iShares Silver Trust (SLV) down 4.8 percent, Market Vectors Steel ETF (SLX) down 3.1 percent, Market Vectors Coal ETF (KOL) lower by 2.9 percent, United States Oil (USO) down 2.7 percent, and SPDR Gold Shares (GLD) down 2.3 percent.
This action by China is interpreted as a strong signal that the extraordinary liquidity provided by global central bankers may begin to be pulled back sooner than anticipated. The strongest economies in the world like China and Australia are likely to reduce monetary liquidity first, eventually followed by industrialized nations in Europe, Japan, and the United States.
Risk assets like equities and commodities are likely to suffer if monetary tightening signals accelerate in the industrialized nations, especially in the United States. The major questions for investors are how soon and how intense central banks will engage in monetary tightening. The answer to the question will differ by country and depend largely on strength in GDP growth and whether inflationary pressures build up quickly.
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