Interpac Business and Migration Solutions Melbourne Australia

(October 20, 2010)

THE Australian dollar and shares retreated today after China's surprise interest-rate hike stoked fears of weaker demand for raw materials.

The People's Bank of China said late last night it would raise the one-year yuan lending rate and the one-year yuan deposit rate by a quarter percentage point each.

“Our China economists are expecting another rate hike later this year,” ANZ analysts said in a report today. “The PBOC move was viewed largely as a negative for global growth prospects and saw risk sent to the sidelines.”

The move by the central bank took global financial markets by surprise and sent gold, copper and oil prices sharply lower and commodity-linked currencies tumbling.

The Australian dollar was one of the first casualties as global markets recoiled, dropping as low as US96.62 cents overnight - a 1.9 per cent fall from yesterday’s domestic close of US98.49c.

It has fallen nearly 4 per cent since it briefly reached parity with the greenback on Friday.

“Any steps China takes to slow their economy is going to slow the global recovery as well,” Matt Zeman, chief market strategist with LaSalle Futures, told Dow Jones Newswires.

“It's going to have a far-reaching ripple effect.”

The Australian sharemarket opened about 1 per cent lower as investors reduced exposure to companies reliant on China’s economy, which is still expected to grow quickly this year and next.

The benchmark S&P/ASX 200 index was down 44.5 points, or 1 per cent, to 4611.2 shortly after opening. The broader All Ordinaries was also 1 per cent lower, at 4678.7.

The Australian dollar was trading at about US96.86c.

The decline followed falls on Wall Street and in European stockmarkets.

The Dow Jones Industrial Average lost 165.07 points (1.48 per cent) to 10,978.62, and closed below the key technical level of 11,000 points for the first time since October 7.

China’s rate increase was the first since 2007 and signalled an attempt by Beijing to ensure the economy’s rapid growth was on a sustainable footing, amid worries about asset bubbles and inflationary risks. The economy grew at a breath-taking 10.3 per cent in the second quarter.

Last week, Beijing ordered the big Chinese banks to bolster capital reserves in a move designed to reduce the pool of money for credit that has fuelled a roaring property sector.

(Source:theAustralian)