Lending restrictions in China turn the screw on the miners

TOP shares recorded a three-week closing low yesterday as more signs of fiscal tightening in China hurt commodity stocks.

The FTSE 100 closed down 92.34 points, or 1.7 per cent, at 5,420.80 – the lowest closing level since December 31, 2009. It posted its biggest one-day fall in a month. The index is up 57 per cent from its six-year trough hit in March 2009.

Miners were hit after sources in China said that the authorities had instructed major banks to stop lending for the rest of January after they went on a lending spree earlier in the month, sending stocks in the region sharply lower.

On Monday, the People’s Bank of China (PBOC) increased capital requirements. Early yesterday, the Bank of China. ordered credit officials to stop making new loans and Reuters reported that the PBOC, China’s central bank, had taken additional steps to slow the flow of credit. An official in the PBOC’s news department declined to comment on the Reuters report.

A 2.4 to 4.2 per cent fall in key base metals prices also hurt mining shares, while energy shares tracked a two per cent drop in crude oil prices.

Rio Tinto, Xstrata, Lonmin, Anglo American, Kazakhmys and BHP Billiton dropped 3.6 to 6.2 per cent.
Among energy shares, Tullow Oil, Cairn Energy, BG Group , Royal Dutch Shell and BP shed 1.2 to 2.9 per cent.

“Considering all the news is quite bad, 100 points off the FTSE is not exactly disastrous stuff. Equities are the one area that will take a hit but the returns are still good,” said Simon Denham, managing director at Capital Spreads.

Banks came under pressure as fourth-quarter earnings from Bank of America and Morgan Stanley added to fears that the recent banking crisis is far from over. Citigroup and JP Morgan have also disappointed markets with their figures in the last few days.

HSBC, Barclays, Standard Chartered, Royal Bank of Scotland and Lloyds Banking Group fell 0.9 to 3.6 per cent.

“Poor earnings have increased the nervousness among investors that the toxic loan crisis could continue to impact bank earnings in 2010,” said Joshua Raymond, market strategist at City Index.

“The speculation from China that they have made another move to cool excessive growth is a deep concern for the heavyweight miners and energy firms,” he added.

Among individual fallers, Imperial Tobacco was the top blue-chip loser, down 3.4 per cent, after the stock went ex-dividend, taking 2.05 points off the FTSE 100 index.

Shire topped a truncated list of FTSE risers, gaining 2.6 per cent, boosted by an upgrade to ‘overweight’ from ‘neutral’ by JP Morgan.

Earlier in the session, pharmaceutical shares got a boost after a Republican win in the US Senate race in Massachusetts robbed Democrats of the crucial 60th Senate vote needed to pass healthcare reform.

However, AstraZeneca and GlaxoSmithKline could not sustain the rally and ended down 0.5 per cent and 0.1 percent respectively.

Some other defensive stocks fared better, with Scottish & Southern Energy, United Utilities and Severn Trent adding 0.4 to 1.2 per cent.

Kraft Foods and Cadbury saw their credit ratings slashed by ratings agency Fitch to the lowest investment grade after Kraft won Cadbury’s backing for its $19.6bn (£12bn) takeover bid. Fitch said it had downgraded its rating on both companies to BBB-.