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China stocks enter bear market amid credit fears China stocks enter bear market amid credit fears
(35 minutes later)
Chinese stocks have fallen further amid continued concern over the impact of a credit tightening on its economy. Chinese stocks have fallen to a four-and-a-half-year low amid continued concern over the government's credit-tightening policy.
The Shanghai Composite SSE index fell 5.3% to 1,859.22 points, entering the bear market territory, often described as a 20% dip from the recent peak. The Shanghai Composite SSE index fell as much as 5.3% to 1,859 points.
The index has dipped 24% since its high of 2,444.80 points in February. This resulted in shares entering bear market territory - describing a 20% fall from a recent peak.
The concern came after the central bank indicated its credit-tightening policy would continue, saying that the era of cheap cash was over. China's central bank has indicated that its credit-tightening policy will continue, saying the era of cheap credit was over.
A government-led credit boom has been one of the key contributors to China's economic growth in recent years.A government-led credit boom has been one of the key contributors to China's economic growth in recent years.
This is the first time since January 2009 that the Shanghai Composite index has fallen below the 1,900 point mark. It has dipped 24% since its high of 2,444.80 points in February.
Controlling creditControlling credit
After the global financial crisis in 2008-09, China unleashed a huge monetary stimulus in an attempt to boost economic growth. After the global financial crisis in 2008/09, China unleashed a huge monetary stimulus in an attempt to boost economic growth.
While the credit boom helped cushion the impact of the crisis on its economy, it led to concern that too much cheap cash had flooded its financial system.While the credit boom helped cushion the impact of the crisis on its economy, it led to concern that too much cheap cash had flooded its financial system.
There have been calls for China to contain this credit boom and also to reduce its reliance on credit and investment-led growth.There have been calls for China to contain this credit boom and also to reduce its reliance on credit and investment-led growth.
In recent days the People's Bank of China (PBOC), the country's central bank, temporarily turned off the flow of cheap money in an attempt to impose more discipline on its banks and reduce their reliance on credit.In recent days the People's Bank of China (PBOC), the country's central bank, temporarily turned off the flow of cheap money in an attempt to impose more discipline on its banks and reduce their reliance on credit.
That resulted in China's banks - mostly state-owned - charging each other some of the highest lending rates ever - over 25% in some cases - triggering fears of a credit crunch.That resulted in China's banks - mostly state-owned - charging each other some of the highest lending rates ever - over 25% in some cases - triggering fears of a credit crunch.
There were fears that the money markets could freeze up completely and put smaller lenders out of business as a result of the central bank's drastic move .There were fears that the money markets could freeze up completely and put smaller lenders out of business as a result of the central bank's drastic move .
But inter-bank lending rates eased on Monday as PBOC made it clear big commercial banks should do a better job of managing their cash reserves and keep lending to smaller players.But inter-bank lending rates eased on Monday as PBOC made it clear big commercial banks should do a better job of managing their cash reserves and keep lending to smaller players.
However, the central bank did not signal it was turning the taps back on, leading traders to speculate that borrowing costs would remain relatively high for medium-sized banks and potentially dent profits.However, the central bank did not signal it was turning the taps back on, leading traders to speculate that borrowing costs would remain relatively high for medium-sized banks and potentially dent profits.
BBC Chief Business Correspondent Linda Yueh said the PBOC's move means that "banks can't count on the central bank for cheap cash". BBC chief business correspondent Linda Yueh said the PBOC's move means that "banks can't count on the central bank for cheap cash".
"In fact, the central bank wants to root out the poorly-performing banks - especially those in the so-called shadow banking system.""In fact, the central bank wants to root out the poorly-performing banks - especially those in the so-called shadow banking system."
'Rippling effect''Rippling effect'
China, the world's second-largest economy, has been one of the biggest drivers of global growth in recent years.China, the world's second-largest economy, has been one of the biggest drivers of global growth in recent years.
It economic rise has seen it become a key trading partner of the other Asian economies, becoming a major market for exports from those countries. Its economic rise has seen it become a key trading partner of the other Asian economies, becoming a major market for exports from those countries.
It buys a variety of products ranging from commodities such as iron ore and coal from Australia and Indonesia to consumer goods from Japan and South Korea.It buys a variety of products ranging from commodities such as iron ore and coal from Australia and Indonesia to consumer goods from Japan and South Korea.
Analysts and investors have been concerned that if growth in China slows sharply, it will impact growth in the region's economies that rely on Chinese demand.Analysts and investors have been concerned that if growth in China slows sharply, it will impact growth in the region's economies that rely on Chinese demand.
As a result, regional markets have been nervous about the developments in China.As a result, regional markets have been nervous about the developments in China.
Japan's Nikkei 225 index dipped 2%, Hong Kong's Hang Seng fell 1.7% South Korea's Kospi index shed 1% and Australia's ASX 200 index was down by 0.5%.Japan's Nikkei 225 index dipped 2%, Hong Kong's Hang Seng fell 1.7% South Korea's Kospi index shed 1% and Australia's ASX 200 index was down by 0.5%.
Leading miners BHP Billiton and Rio Tinto, which rely heavily on demand from China, were down by more than 2% on the Australian Securities Exchange.Leading miners BHP Billiton and Rio Tinto, which rely heavily on demand from China, were down by more than 2% on the Australian Securities Exchange.
Analysts said that if fears over China continued to grow, it may hurt mining shares further.Analysts said that if fears over China continued to grow, it may hurt mining shares further.
"The actions from the Chinese government to reduce liquidity in China will have on-flowing effects to other firms as well," said Tim Radford, a global analyst at Rivkin."The actions from the Chinese government to reduce liquidity in China will have on-flowing effects to other firms as well," said Tim Radford, a global analyst at Rivkin.
"It's a rippling effect and that's obviously impacted risk appetite in the Aussie market out of fears something could go wrong in China.""It's a rippling effect and that's obviously impacted risk appetite in the Aussie market out of fears something could go wrong in China."