News Room - Business/Economics

Posted on 04 Jun 2008

Asian stocks slide on renewed credit crisis, inflation worries

Asian stocks slid Tuesday due to fears that high inflation threatened economic growth and following a Wall Street tumble triggered by renewed concerns about the global financial crisis.

Japanese shares ended 1.6 percent lower as concerns about the health of major US banks following huge losses caused by the default crisis among riskier -- or "subprime" -- mortgages once again came to the fore.

US banking giants Wachovia and Washington Mutual shook up top management Monday and Standard & Poor's cut its credit ratings on Lehman Brothers, Merrill Lynch and Morgan Stanley due to the crisis.

Those developments spread jitters among US investors, pushing Wall Street down more than one percent and setting a downbeat tone for Asia, where Taiwan and Australia both closed more than 1.5 percent lower Tuesday.

"Things are probably going to be a little bit subdued for a little while longer in Asian markets," Matt Robinson, an economist at Moody's Economy.com in Australia, told AFP.

Elsewhere, South Korea closed 1.5 percent lower and Singapore was trading over one percent down. Chinese and Indian shares were in the red too, while New Zealand closed down more than two percent and Manila ended 1.5 percent lower.

Runaway inflation

Investors were also grappling with the problem of rising prices in Asia due to surging food and fuel costs, with inflation running at its highest level for many years in a number of countries.

China said Tuesday runaway inflation, currently about 8.5 percent, remained the top risk for its economy, while Malaysian Prime Minister Abdullah Ahmad Badawi called for bold international steps to curb food and fuel prices.

"Inflation will probably weigh on the Asian stock market for a little time to come," Katie Dean, a senior economist at ANZ bank in Australia, told AFP.

"In Australia, it's not just food and fuel, it's a broad-based inflationary environment," she said, adding that pressure was growing on some Asian countries to let their currencies rise to make raw material imports cheaper.

Investors fear high inflation will hit consumer spending, squeeze business profits and lead to higher borrowing costs as central banks try to curb economic growth to calm prices.

Economies such as Indonesia and Taiwan have already raised petrol prices as traditional Asian energy subsidies and fuel price caps stretch national budgets

due to high oil prices, which were around 127 dollars per barrel Tuesday.

"It all comes back to oil," said Pierre Gave, the head of research at Hong Kong-based consultancy GaveKal. "If we see the oil price rolling over, then people are going to be much happier."

"More and more countries are abolishing energy subsidies," he told AFP.

The subprime mortgage default crisis has triggered a global credit crunch and, according to the IMF, could lead to losses of some one trillion dollars.

The United States is battling to recover from the fallout and a slowing housing market, amid expectations of an American-led world economic slowdown.