China Threatens Stock Markets

Hottest issue these days is China’s monetary tightening undertaken. Toward the Lunar New Year holiday on the day last Friday, China’s central bank announced its latest monetary policy tightening by raising minimum reserve requirements for China’s big banks amounted to 0.5 percent from February 25 this year. Thus, the statutory minimum for China’s big banks to 16.5 percent. This is the second time China raised the statutory minimum. The last on January 18, 2010.

The policy was carried out by China’s central bank to offset the inflationary pressures that began to grow due to China’s growing economic extraordinary. The inflation rate as measured by the consumer price index, rose 1.5 percent compared to last year for the Month of January 2010.And the possibility of the inflation rate will be higher for the months that followed.

What is the impact of this monetary tightening to a stock index?

As we all know, China’s monetary tightening is aimed to curb credit expansion has been done before by the major banks of China.
This credit is one source of income from banking and automatic banking revenue is likely to reduce later. Moreover, this tightening is also likely to cause companies which during the lean business expansion through bank loans may be slightly disrupted business. In essence, monetary tightening is aimed at absorbing liquidity that has so many digelontorkan to market and reduce hot money and prevent the economy becomes overheated or a bubble. In the short term this will certainly affect negatively to the index of Asian stocks, particularly China and Hong Kong stock index. Banking shares which are shares of large and highly influential berkapitalisasi to the movement of stock indices will be suppressed. So also share properties that are not directly related to banking conditions will also be depressed.

During the year 2010, the market will pay close attention signals monetary tightening by central banks in countries that previously poured so much money to support their economy. Although monetary policy in the long run be good for economic development of the country concerned, but in the short term will reduce the movement of stock indices.

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