Chinese interest rate warning sends Asian markets tumbling

Chinese interest rate warning sends Asian markets tumbling
By Sean O'Grady, Economics Editor
Published: 26 June 2007
Independent UK

Stock markets throughout the Asia-Pacific region suffered sharp falls yesterday on a combination of official warning from Chinese government officials and generalised fears of the rising tide of interest rates worldwide.

China's stocks plunged by the most in three weeks to a two-week low in volatile trade after the central bank's governor, Zhou Xiaochuan, said shares may be overvalued and that he couldn't rule out raising interest rates. The benchmark CSI 300 Index fell 173.84, or 4.3 per cent, to close at 3877.59, its lowest since 8 June. Citic Securities, China's biggest publicly traded brokerage, lost 3 per cent, to 55.29. Shanghai International Airport Co, operator of China's second-busiest airport, fell 6.5 per cent. Interest rate worries and lower property stocks dragged Japanese equities down, while in Singapore shares saw the sharpest decline in two weeks.

"Zhou's remarks are damping sentiment on the market and as a result investors may be selling for fear of further policies," said Fan Dizhao, of Guotai Asset Management in Shanghai. Yesterday's drop echoes a similar, more dramatic turn of events last month which had an even bigger impact on global equities. A government move to triple the tax on share trading then prompted the CSI 300 to plummet as much as 22 per cent in five days. There was little official follow-up to that however, which helped the index to rebound from the rout in less than two weeks. "We're not sure whether there's a clear bubble, but we worry" that shares are priced too high compared with earnings, Mr Zhou told reporters in Basel, Switzerland, where he attended a meeting of central bankers over the weekend. "We don't rule out further rate increases if necessary," and inflation remains a concern, Mr Zhou said.

The Chinese central bank's renewed concerns come as China's CSI 300, which tracks yuan-denominated A shares listed on China's two exchanges, is valued at 43 times reported earnings, the most expensive among the Asia-Pacific Region. It has almost doubled this year. Anecdotal and statistical evidence of bubble abounds, with everyone from students to taxi drivers piling into China's booming equity markets - all despite those attempts by the authorities to apply the brakes.

Official figures on this upsurge in popular capitalism are startling; some 27 million brokerage accounts have been opened this year.