Friday, October 10, 2008

Asia plunges futher into financial chaos

Asia plunges futher into financial chaos
Japan's Nikkei index fell 10pc and the price of oil hit a 12-month low of $83 a barrel as fears intensified about a global recession.

By Malcolm Moore in Shanghai The Telegraph

A move by US and European central banks, as well as by central banks in China, Taiwan, Hong Kong, Australia and South Korea, to slash borrowing costs has failed to reassure investors.

"It's impossible to predict the bottom, and technical analysis is meaningless as panic and fear overwhelm the markets," said Jang Huh, at Prudential Asset Management in Seoul.

Japan’s Nikkei stock index fell 10pc, the biggest loss since “Black Monday” in October 1987 and it third biggest loss ever. The index, which closed down 881.06 points at 8,276.43, has lost more than 24pc over the past week.

Prime Minister Taro Aso warned that the slump could have real effects on Asia’s largest economy. The share price fall “has reached a point where it affects the real economy and fund raising,” he told reporters.

All indications are that European markets will open sharply lower.

The sudden plunge in the price of oil followed falls in the price of other commodities, including steel, as investors gambled that a recession would translate into falling production in the world's factories. Both Ford and Volkswagen have confirmed that their sales growth has dramatically slowed in China.

Even Japanese government bonds, traditionally the safest haven for investors, were being sold off as investors scrambled to translate their assets into cash. The yield on the 1.5pc 10-year bond rose 3.5 basis points.

In China, the government took the unprecedented step of ordering all foreign companies operating on the mainland to declare the state of their financial health and to provide details about how the ongoing crisis could affect their business.

Chinese companies in joint ventures with foreign firms will also have to testify about their partner's solvency, amid fears that the collapse of a major company in China could cause widespread shocks.

Meanwhile, China's markets regulator has asked for unofficial "audits"

of all foreign financial institutions in the country. The decision includes Hong Kong-based banks, hedge funds and private equity houses.

All new share listings have been suspended. In 2005, the markets regulator suspended all new offerings for 12 months in response to market turbulence.

The lack of confidence in Asia continued to weigh heavily on markets, with the Shanghai composite index touching the 2,000 point barrier at one point. By lunchtime, the Chinese market was 2.8pc down at 2015.

In Hong Kong, the Hang Seng index dropped 7pc to a near three-year low, and the market has lost almost half its value since the beginning of the year. In Singapore, the market fell more than 6.6 percent, after new statistics showed that the island, one of the richest economies in the world, was in recession. Sydney fell 6.5pc.

The falls followed another plunge in the Dow Jones Industrial Average in the US, which closed beneath 9,000 points for the first time in five years, wiping out almost USD900 billion in market value.

The crisis of confidence in Asia has seen HSBC, Hong Kong's biggest bank, defy the island's central bank by leaving its benchmark lending rates unchanged. Even though interest rates have been slashed by a full percentage point, the interbank lending rate – the rate at which banks lend money to each other - has spiked to a one-year high after the region's banks refused to believe in each other's solvency.

“It is ghastly,” said Macquarie Equities associate director Lucinda Chan in Sydney. “Investors are buying up gold. It’s the only safe haven out there, otherwise it’s red everywhere.”

CMC Markets senior dealer Matthew Lewis described the rout as “total market capitulation”.

India’s central bank said it would inject a further 400bn rupees ($£5bn) into the financial system, by cutting the cash reserve commercial banks must hold to 7.5pc.

“This was done due to the evolving liquidity situation in the context of global and domestic developments,” the RBI said in a statement.

The injection came as shares on the Bombay stock exchange fell more than 7pc.

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