China's surprise move to further tighten its monetary policy spooked the world's markets yesterday, just as investors in equities, bonds and commodities appeared to be putting the panic of this week's Greek sovereign debt crisis behind them.
China's central bank announced that commercial banks in the country had been ordered to increase the size of their reserves by 0.5 percentage points, the second such move in the space of the month. The effect will be to reduce the capital China's banks have to lend, as Beijing tries to cool the resurgence its economy has been enjoying before a full-scale inflationary bubble develops.
The announcement sparked an immediate sell-off of assets seen as in any way risky. As a result, the US dollar rose sharply, while the euro fell back. Equity markets suffered declines too, while commodity prices were also adversely affected.
China's move capped a tough week for investors anxious about levels of debt and the sustainability of the global economic recovery.
In Europe, markets were relatively calm prior to the Chinese move, despite the release of new data suggesting that the recovery in the eurozone could be set to go in reverse. Investors appeared to be reassured by the European Union's promise to stand behind Greece – and, by implication, other indebted members of the eurozone – despite the uncertainties about the statements made by member states' leaders at a summit on Thursday. However, anxiety about the knock-on effects of China's attempts to slow its economic growth fractured the calm. The euro touched a nine-month low against the dollar, share prices fell across the continent and yields on government debt rose sharply.Reuse content