Slowdown fears after China rate hike sent Asian stocks lower

16:45 | 20/10/2010

HONG KONG, October 20, 2010 - Fears of a slowdown in the Chinese economy after a rise in interest rates led to a sell-off in Asian stocks on Wednesday.

Traders grew concerned that any easing in the world's second biggest economy could hurt

exports as several countries look to China's growth as the key to their recovery from the global downturn.

Shanghai dropped 1.46 per cent, Tokyo tumbled 2.18 per cent by the break and Hong Kong slipped 1.86 per cent while Sydney was 1.22 per cent lower with resources firms hit as they rely heavily on Chinese demand for their revenues.

Singapore fell 0.97 per cent.

The People's Bank of China announced late Tuesday it would raise the benchmark one-year lending and deposit rates by 25 basis points each, as Beijing tries to contain inflation and soaring property prices. It was the first rate rise since December 2007.

"We expect negative sentiment to remain in the short run, weighing on risk assets globally, as global markets are very sensitive to slowdown risk in the country that led the world out of recession," Credit Agricole Corporate and Investment Bank said in a note to clients, according to Dow Jones Newswires.

The move was the latest by the government aimed at winding down huge stimulus measures introduced last year as Beijing tried to guide the country through the downturn.

It has been trying to rein in its red-hot real estate sector, which leaders fear could overheat and derail economic growth, but with little success.

Beijing had held off raising rates earlier partly due to concerns it could attract speculative money chasing a higher yield and so complicating its efforts to keep the Chinese yuan stable.

Inflation has also been on the rise in recent months, growing at its fastest pace in nearly two years in August, as food prices rose due to severe floods and unusually hot weather that destroyed crops.

Authorities have also been keen to cap bank loans -- which hit a record last year as part of the bid to boost the economy -- amid concerns too much bad debt for lenders could lead to defaults.

The dollar was holding on to its gains made in New York on Tuesday after the rate news. Traders bought into the greenback due to its status as a safe haven in a time of economic uncertainty.

The euro bought $1.3732  in Tokyo morning trade, hardly changed from New York late Tuesday where it had fallen from 1.3906.

The dollar edged down to 81.44 yen from 81.54 yen in New York. It had sat at 81.21 before the rate rise.

"The rate hike triggered dollar buybacks as it reversed the recent market movements" focussing on growing expectations of a US monetary easing, said Mizuho Corporate Bank market economists Daisuke Karakama.

The hike comes as data to be released Thursday is likely to show the Chinese economy slowed to high single-digit growth in the third quarter, after expanding 10.3 per cent in the second quarter and 11.9 per cent in the first three months of the year.

On oil markets New York's main contract, light sweet crude for November delivery, rose 41 cents to $79.90  a barrel after dropping $3.49  late Tuesday in its biggest one-day fall since early February.

Brent North Sea crude for December delivery was up 20 cents to 81.30 dollars after closing 3.27 dollars lower the day before.

Gold opened at $1,337.00-$1,338.00 an ounce in Hong Kong, sharply down from Tuesday's close of  $1,368.00-$1,369.00 .

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