China fall spooks markets

China's Shanghai Index plunged more than 5 per cent in afternoon trading as investors dumped stocks on fears of a liquidity crunch in the country's banking system. Photo / AP

Interbank rate leaps amid concern that credit squeeze will add to slowing economy.

Markets across the region were further rattled yesterday as the Chinese stockmarket fell to its lowest level in four years amid fears that a credit squeeze would worsen the country's economic slowdown.

China's Shanghai Index plunged more than 5 per cent in afternoon trading as investors dumped stocks on fears of a liquidity crunch in the country's banking system.

The Shanghai Composite Index recovered to close down 0.18 per cent but the slump followed a 5.3 per cent drop on Monday.

It is understood the People's Bank intervened to allay fears late yesterday.

Investors have been spooked as Chinese cash dries up and the interbank rate - the interest banks charge to lend to each other - has jumped, raising fears they will cut back on loans, which would in turn drag on the economy.

The local NZX50 index closed down 1.1 per cent yesterday increasing the market's decline since its May 13 peak to 7.6 per cent.

Shane Solly, portfolio manager at Mint Asset Management said the New Zealand market was still dealing with the US Federal Reserve governor Ben Bernanke's comments from last week, confirming he would pull back on its quantitative easing programme later this year.

Solly said New Zealand was seen as a strong yield market and people were pulling out of investments on the idea bond yields would rise.

Solly said a fall in China's stock market was also having an impact, although Australia's sharemarket was at more risk from the China situation.

Solly said Australia was more exposed through its mining stocks than New Zealand where most of this country's exposure was via soft commodities - an area which was not showing weakness in demand.

Meanwhile, the New Zealand dollar continued its decline going close to the US77c mark. The kiwi declined to US77.16c as at 5pm in Wellington from US77.55c at 8am and US77.47c on Monday.

The New Zealand and Australian economies are closely linked with China's fortunes, with both countries exporting large quantities there.

"As long as the China jitters linger, the kiwi's going to suffer more than most," said Mike Jones, currency strategist at BNZ in Wellington.

The local currency has shed about 4.1 per cent against the greenback since Bernanke said the central bank may start tapering its US$85 billion ($109 billion) a month asset purchase programme this year if economic data continues to improve.