LONDON Global stock markets reeled Monday, with Shanghai's index enduring its biggest loss in four years, after an increase in China's commercial lending rates sparked fears about the state of the world's second-largest economy.
Analysts say the spike in the country's interbank lending rate was part of an effort to curb the high level of off-balance-sheet lending in China that could threaten the country's financial stability.
But investors feared the move could also hurt economic growth. China's major state-owned banks are unwilling to lend to any but their biggest clients, so the vast majority of smaller businesses must rely on informal lending.
Mainland China's Shanghai Composite Index plummeted 5 percent to 1,968.51 while the smaller Shenzhen Composite Index plunged 6.1 percent to 881.87.
The drop unsettled European markets, where Britain's FTSE 100 fell 0.6 percent to 6,077.58 and France's CAC-40 slid 1.1 percent to 3,616.81. Germany's DAX was down 0.7 percent to 7,732.27 after a key business sentiment index rose slightly, suggesting the recovery in Europe's largest economy continues, though at a slow pace.
Wall Street also appeared headed for losses, with Dow Jones industrial futures down 0.6 percent to 14,624. S&P 500 futures lost 0.7 percent to 1,573.30.
Analysts at Moody's Investors Service said that they saw the Chinese central bank's action as "having been the result of a conscious decision" to curb credit growth.
Moody's added that a prolonged credit crunch could threaten Chinese companies, "especially those in the private sector with weak credit quality, because it heightens the risk that banks will scale back lending to those companies." Moody's says that China's central government finances remain strong, but that rapid credit growth and liabilities at the local level pose a threat to growth.
Andrew Sullivan of Kim Eng Securities in Hong Kong said China's new leaders want credit to be available to keep the economy moving but not so much as to promote asset bubbles.
"After six months in power, the new leadership is putting its policies in place. It's signaling that credit is going to remain tight," Sullivan said. "All that is in line with moving China from being an export driven economy to being a domestic consumption economy."
The concerns over China's credit market were magnified by existing worries that access to money will tighten in the world's largest economy, the U.S.
Investors fear what will happen as the U.S. Federal Reserve slows down its monetary stimulus program, which has been pumping $85 billion into the financial system every month and helped many stock indexes reach multiyear or record highs. Markets tumbled last week when Fed Chairman Ben Bernanke said the program would likely slow down this year and end in 2014.
The market impact of the Fed's stimulus withdrawal would be magnified if China tightens its monetary policies at the same time.
Elsewhere in Asia, Hong Kong's Hang Seng fell 2.2 percent to 19,813.98. Japan's Nikkei 225 index, the regional heavyweight, fell 1.3 percent to 13,062.78. South Korea's Kospi lost 1.3 percent to 1,799.01. Australia's S&P/ASX 200 shed 1.5 percent at 4,666.50.
In energy markets, benchmark oil contract for August delivery was down 19 cents to $93.50 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.71 to close at $93.69 in New York on Friday.
In currencies, the euro fell to $1.3100 from $1.3139 late Friday in New York. The dollar rose to 97.94 yen from 97.76 yen.