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China's central bank shakes up markets

June 24, 2013 at 10:32 AM   |   Comments

BEIJING, June 24 (UPI) -- China's central bank announced Monday it would allow the financial marketplace to react on its own to rising interest rates, a move that shook up markets.

The overnight benchmark lending rate involving bank-to-bank loans hit a record 13.44 percent last week but the People's Bank of China did not move to lower the rate, which it could have done by pumping money into the financial system.

A temporary glut of cash would have brought interest rates down.

Instead, the central bank said Monday there was "a reasonable level" of liquidity in the country's banking system, The New York Times reported.

The benchmark interest rate fell to 6.489 percent from 8.492 percent Friday. But stock markets across Asia and Europe declined on the clear sign from the central bank that leaders were aiming to slow China's rapid economic growth.

High interest rates would force banks and customers to reassess lending priorities. Banks would tend to move toward more conservative lending and customers would be forced to pull back on all but the most solid or dependable business ventures.

"China's credit-to-gross domestic product ratio [is] at 200 percent, we believe that the People's Bank of China is acting in line with the government's efforts to deleverage, rebalance and position the economy towards a path for sustainable growth," Barclays economists Yiping Huang and Jian Chang wrote in a recent research note.

The bank's statement reverberated through markets. The Shanghai composite index suffered a ground-zero shake-up with the index down 5.3 percent Monday. In addition, the Shenzhen composite index dropped 6.1 percent.

In Hong Kong, the Hang Seng Index lost 2.2 percent. In Japan, the Nikkei 225 lost 1.26 percent.

Markets were down across Europe, dropping 2.34 percent in Belgium, 1.62 percent in France and 1.06 percent in Germany in midday trading.

The Global Dow Index fell 1 percent and markets opened lower on Wall Street, with the Dow Jones industrial average off 0.89 percent and the Standard & Poor's 500 off 1.24 percent.

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