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Curbing spooks investors

By Cong Mu (Global Times)

08:33, February 22, 2013

Chinese stock markets Thursday followed an overnight decline in the US market, prompted by monetary supply tightening signals from China and the US, analysts told the Global Times Thursday.

The Shanghai Composite Index, a benchmark index for the mainland market, closed down 71.2 points, or 3 percent, at 2326 points Thursday, while Hong Kong's Hang Seng Index dropped 400.7 points, or 1.7 percent, to close at 22,907 points.

There are two signs of tightening in the Chinese market: new State Council measures to cool off the overheated housing market, and open market operations by the People's Bank of China, the central bank, to withdraw a record amount of liquidity this week, Dariusz Kowalczyk, a senior economist and strategist at French investment bank Credit Agricole Corporate and Investment Bank, told the Global Times Thursday.

"The market today remains nervous about how the property market will be curbed, and what tools will be used," said Kowalczyk, noting that both of the above activities were aimed at preventing inflation and excess gain in home prices in the country.

The central bank drained 910 billion yuan ($145.7 billion) through repurchase agreements (repos) and the maturity of reverse repos this week. "Three quarters of the drainage reverses extraordinary liquidity injected into the system before the lunar new year, but about a quarter is aimed at liquidity tightening after money market rates declined recently," Kowalczyk wrote in a note Thursday.

"We expect continued liquidity tightening throughout the year and higher yields at open market operations, as well as lending rate hikes in the second half of 2013," he said.

Meanwhile, minutes of the US Federal Reserve's latest policy meeting showed some US policymakers thought the Fed might have to slow or stop its bond buying program, or quantitative easing 3 (QE3), before seeing a pick-up in employment, Reuters reported Thursday.

The S&P 500 index in the US fell on the news Wednesday by 19 points, or 1.2 percent, to 1,512 points.

Chinese investors may also have been upset by such negative sentiment from the US, but if the Fed eventually halts the QE3 program, it may not be a bad thing in the medium to long term, because it suggests that the global macroeconomic environment may be stabilizing, Shi Henghui, an analyst at Wuhan-based Changjiang Securities, told the Global Times Thursday.

The US government may have realized that the QE programs cannot last forever, since its government debt-to-GDP ratio is too high, in addition to the QEs' other side effects, Chen Hong, a researcher at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, told the Global Times.

If the QE3 really grinds to a halt, its end may have a moderately negative impact on the Chinese economy, since it will heighten uncertainty in the global market and cause international capital to flee back to the US from emerging markets, Kowalczyk said.

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