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US woes may spark writedowns

By Wang Zhenghua (China Daily)
Updated: 2008-09-17 10:48

The fallout from the US financial woes could trigger a further writing down of asset value and prompt Chinese leaders to speed up the shift in focus to economic growth from inflation, analysts said yesterday.

The demise of Lehman Brothers and troubled Merrill Lynch being forced to accept a takeover by Bank of America Corp probably triggered the central bank's decision to cut lending rates and lower its reserve requirement ratio for smaller lenders, providing further evidence that an overall macroeconomic policy turnaround is on the way.

They expect the central bank to relax the credit quota, lower the reserve requirement ratio further and possibly cut policy rates at least one more time before the year's end.

China lowered its benchmark lending rate by 0.27 of a percentage point to 7.2 percent from yesterday. The reserve requirement rate for small banks was cut by 1 percentage point to 16.5 percent, with this taking effect from September 25.

Lehman Brothers, which kicked off its China expansion in 1993, invested $90 million with IBM to establish a China investment fund in 2006. Last year, the global investment bank acquired a 7.7 percent stake in Kingdee Software, and poured $10 million in Qunar.com, an online travel search engine.

Analysts said its investments in China need further observation despite a notice issued by the company yesterday saying that its planned bankruptcy protection does not apply to its US subsidiaries or attached companies as well as subsidiaries embarking on brokerages and investment management.

Analysts said that the latest US financial woes would have an impact on China's macroeconomic control policies and could see the tightening monetary policies relaxed.

"It provided further evidence that an overall macroeconomic policy turnaround is coming, probably during the fourth quarter as we have been anticipating," said Huang Yiping, an economist at Citi.

"We expect the central bank to relax the credit quota, further lower the reserve requirement ratio and possibly cut policy rates at least one more time before the end of the year. And fiscal expansion can gain further momentum, with a specific focus on tax reduction, housing stabilization and social welfare system development," he added.

Ma Hongman, a researcher at Shanghai University of Finance and Economics, said that the crisis led by Lehman Brothers will have a limited direct impact on China's real economy, but its effect on China's macro policy is very important.

"The latest adjustment by the central bank suggests a turnaround from the earlier tightened monetary policy to a more positive one," he said.