China, India wary of taint of global economic crisis
Sat Nov 1, 2008 8:39am EDT
By Angus MacSwan
LONDON (Reuters) - Two powerhouse emerging market countries felt the sting of the global financial crisis on Saturday as India unexpectedly cut its main short-term lending rate again and China said it was now feeling a slowdown.
The developments followed signs elsewhere this week that world markets were stabilizing, with interbank rates falling and U.S. stocks posting their best week in 34 years.
"The impact of the crisis on China has just started to appear as China has already seen a sharp slowdown in industrial profit growth and fiscal income," a senior Bank of China (BOC) executive said in Shanghai on Saturday.
The global economy will likely enter recession next year with the United States, Europe and Japan posting negative growth, Executive Vice President Zhu Min told a financial conference.
"That will have a huge impact on China," he said.
Zhu also said currency volatility was expected to add further pressure on China's banks, which have enjoyed robust profits for years as the country boomed. Earnings growth is now slowing as the economy cools from the impact of the crisis.
"The uncertainties in the world's currency markets have exposed the Chinese banking sector to higher foreign asset risk," Zhu said.
A central bank spokesman said Beijing was no longer imposing strict limits on bank lending as it sought to preserve growth in its economy, in which the overseas market is important.
ACTION ON THE LIQUIDITY FRONT
In India -- like China, a magnet for foreign investment in recent years as their economies roared -- the central bank cut its main lending rate for the second time in as many weeks to ease a cash squeeze and spur economic growth.
Analysts said the surprise move showed Indian concern that strains on Asia's third-largest economy were quickly becoming more severe.
"These actions were necessary (and had) to be taken on the liquidity front...the situation was getting worse," said Vikas Agarwal, strategist at JP Morgan.
The central bank cut the repo rate or its main short-term lending rate by 50 basis points to 7.5 percent and banks' cash reserve requirements by 100 basis points to 5.5 percent.
It also cut banks' bond reserve requirements by 1 percentage point to 24 percent of their deposits, the central bank said.
"The global financial turmoil has had knock-on effects on our financial markets; this has reinforced the importance of focusing on preserving financial stability," the bank said.
Policymakers around the world have slashed interest rates in recent weeks and injected huge amounts into their banking systems to try to combat the spillover effects of the global crisis, which is causing credit markets to freeze up and threatens to plunge the world economy into recession.
Indian bankers said they would adopt a wait-and-see stance before deciding on lowering their lending and deposit rates.
SWISS MORE CONCERNED
In Europe, the Swiss National Bank said it was more concerned than it was a month ago over the Swiss economy.
"The situation has noticeably worsened because the financial crisis is clearly affecting the real economy." SNB Chairman Jean-Pierre Roth said in a newspaper interview.
The fast rising Swiss franc and an off-target benchmark three-month interest rate were problems, Roth said.
"We have two elements which are not pointing in the right direction -- the nominal development in the franc and the three-month LIBOR rate, which is above our target," Roth told the Neue Zuercher Zeitung. "This is a big challenge for us."
He declined to say whether he thought Switzerland was facing a recession next year.
In the United States, where the question of whether Republican candidate John McCain or Democrat Barack Obama would handle the economic crisis best has dominated debate before next Tuesday's presidential election, the business outlook weakened.
A U.S. Commerce Department report on Friday showed consumers cut monthly spending for the first time in two years in September, evidently bracing for hard times as jobs continue to disappear and credit conditions tighten.
Another survey showed U.S. consumer confidence in October suffered its steepest monthly drop on record.
"Consumers reported the most dismal assessments of their current financial situation ever recorded," the Reuters/University of Michigan Surveys of Consumers said.
As another week ended in the worst financial crisis in 80 years, the Bank of Japan slashed interest rates, British banking giant Barclays said it was raising $12 billion in capital and a U.S. lawmaker demanded that banks use money from the country's $700 billion financial bailout package to boost lending.
But there was at least one hopeful sign as the closely watched interbank lending rates fell, suggesting that the moves taken by central banks and others to remove blockages in the credit system were working to some extent.
That helped push U.S. stocks higher, with financial stocks leading a rally as investors picked up bargains following recent heavy losses. European shares reversed losses and followed Wall Street higher.
Nevertheless, the Dow Jones Industrial average in October had its worst one-month percentage drop since August 1998.
The Bank of Japan rate slash followed a cut by the U.S. Federal Reserve on Wednesday. The European Central Bank and the Bank of England are expected to do the same next week.
© Thomson Reuters 2008