China's stocks fell sharp on bank reserve hike

The benchmark Shanghai Composite Index closed down 257.34 points or 7.73 percent at 3,072.33, off an intraday low of 3,045.06. The closing percentage fall was the biggest single-day decline since June 4, 2007, when it fell 8.26 percent. Tuesday's slide in the Shanghai and Shenzhen markets erased about $240 billion of value.

The hike, the fifth this year, will bring the reserve requirement ratio for most lenders to a record 17.5 percent. It was the first time this year that the central bank had opted for an increase of more than half a percentage point, pointing to concerns over the buildup of funds in the banking system.

The People’s Bank of China, the country’s central bank, announced on Saturday that it would raise the proportion of assets that banks must hold as reserves by a full percentage point, in two equal steps on June 15 and June 25. The increase, the fifth this year, tightens monetary policy by leaving banks with less money to lend.

The move will drain about 422 billion yuan ($61 billion) from the financial system, according to calculations by Bloomberg. The central bank also raised interest rates six times last year to help control inflation.

Today's decline cast a heavy pall in Asian markets, which had retreated Monday in reaction to a sharp pullback on Wall Street after a spike in oil prices and rise in the U.S. jobless rate. Although the Dow Jones industrial average recovered on Monday, as crude prices settled back down slightly, but that wasn't enough to revive investors today in Asia.

Photo: Reuters