2013.06.2404:29:03UTC+00China stocks plunge to lead Asian declines

Chinese stocks dive down on Monday, leading most Asian markets lower, as a recent increase in Shanghai interbank interest rates fueled worries about the impact from tighter policies on the world’s second-largest economy.

The Shanghai Composite traded 3% lesser to 2,010.77 by the midday break, while the Hang Seng Index in Hong Kong pulled back 1.6%, dropping for a fifth straight session to stay close to nine-month lows.

Short-term interbank interest rates in Shanghai, which hit record highs on Thursday, continues its decline from levels seen on Friday but remained above the 6% level Monday, according to Dow Jones Newswires. This fed worries that the People’s Bank of China may keep those rates at a high level.

“The worst of the liquidity crunch may now be behind us, but we believe interbank rates will stay at elevated levels until at least the second week of July,” said Standard Chartered economist Stephen Green.

“The longer this policy lasts, the more concerns about banking-sector stability will be raised. It may also cause slower credit growth in the second half,” he said.

Moody’s Investors Service Vice President Bin Hu also echoed similar concerns. Hu said the ratings agency interprets the tight liquidity conditions as a conscious decision by the Chinese central bank to curb credit growth and that they regard such moves as credit-positive for the health of the overall banking system.

“However, the method the [People’s Bank of China] chose to keep the banking system short of liquidity entails risks that could have credit-negative implications, particularly for small and midsize banks that are more dependent on the interbank market,” Hu said.

Chinese banks and consumer financial stocks suffered further declines. In Hong Kong, Industrial & Commercial Bank of China Ltd. dropped 2.5% and Agricultural Bank of China Ltd., or ABC, lost 2.6%, while footwear major Belle International Holdings Ltd. stumbled 6.1%.

In Shanghai, ICBC relinquished 2.4%, and ABC skidded 2.7%, while Tsingtao Brewery Co. shrank 1.9%.

Elsewhere in the region, Australia’s S&P/ASX 200 fell 1.3%, and South Korea’s Kospi dropped 0.6%, while Japan’s Nikkei Stock Average was flat in choppy afternoon trading, after moving in both directions.

The performance followed Wall Street’s losses last week after the Federal Reserve signaled it may downscale, or “taper,” its bond purchases later this year.

“Markets are very fragile at present, and reaction to the [Federal Reserve’s] announcement of potential tapering in 2013 highlights what little tolerance there is to a shift in policy,” said Perpetual head of investment market research Matthew Sherwood.

“While the very talk about tapering does not actually mean imminent action, the market movements suggest that portfolio managers have already begun adjusting positions, as the days of indefinite excessive liquidity leading to artificially priced asset markets is clearly over,” Sherwood said.

The volatility in Tokyo also came amidst losses for U.S. equity index futures, with Dow Jones Industrial Average futures falling 55 points, or 0.4%, to 14,656, while S&P 500 futures shed 0.4% to 1,577.20.

Japanese stocks had risen sharply earlier in the day after yen extended its decline and the ruling party won a sweeping victory in Tokyo elections.

The ruling Liberal Democratic Party’s sweeping victory in the Tokyo metropolitan assembly elections, coming a month ahead of the key polls for the upper house of the parliament, also aided the advance.

“We expect a positive impact on Japanese stocks and negative implications for Japanese government bonds on the back of rising expectations for continuation of a stable” administration of Prime Minister Shinzo Abe, RBS Securities economists led by Junko Nishioka wrote to clients.

A drop in shares of some retailers and exporters weighed the broader market.

Seven & I Holdings Co. fell 1%, Nissan Motor Co. lost 2.4%, and Honda Motor Co. dropped 1.7%.

Bucking the trend, shares of Softbank Corp. climbed 2%, extending strong recent gains after Dish Network Corp. last week withdrew a rival bid to acquire U.S. telecommunications firm Sprint Nextel Corp..

In Sydney, a number of miners’ shares dropped as a firming U.S. dollar weakened the outlook for commodities.

Newcrest Mining Ltd. slumped 7.1% after gold futures skidded nearly $100 an ounce last week.

Concerns about China’s economic-growth trajectory also weighed on the sector, with BHP Billiton Ltd. dropping 3.3%, and Fortescue Metals Group Ltd. losing 4.6%.

Shares of AMP Ltd. plunged 10.4% in strong volume after the company issued a warning on its first-half profit due to rising life-insurance claims.