Asian hope

Europe continues to tighten the screws on financial markets

Global stock markets recovered their decline yesterday amid reports of growth in China's economic performance. But this rise may soon give way to a correction, since such news is not able to maintain a positive mood among investors for long. In addition, as GDP increases in China, inflation also increases, which pushes the authorities to strengthen monetary policy. Europe, meanwhile, continues to tighten the screws on financial markets: yesterday Germany and France called for a ban on short selling of shares and government bonds of European Union countries.

According to Reuters sources, exports in China rose 50% in May this year compared to the same period last year, and the volume of new loans exceeded analysts' forecasts by 5%. Over the month, lending fell to 630 billion yuan from 774 billion in April. At the same time, consumer prices added 3.1%, which also exceeded expectations. Official Chinese statistics will be published today. “Given that these data are very close to what we want to see, this is actually very good news for the Chinese economic recovery and should allay some of the fears of a sharp slowdown in China's economic growth rate,” a Royal Bank of Canada strategist told Bloomberg Brian Jackson. The Shanghai Composite index rose by 2.8% yesterday, the CSI 300 index, reflecting the dynamics of the Shanghai and Shenzhen markets, by 3.1%.

“Shares could fall on Thursday as investors' excitement over exports wears off and they start thinking about excessive consumer price increases,” said fund manager Hamon Asset Management Ltd. Monica Yang. “Accelerating inflation is increasing pressure on the Chinese government to push the yuan higher, which will hurt future exports.”

European markets also began to rise yesterday after a three-day decline. The pan-European index rose by 0.65% by mid-trade, while the indices of Great Britain, Germany and France were within 0.6%. European investors were alarmed by the statements of the leaders of Germany and France. Chancellor Angela Merkel and President Nicolas Sarkozy propose to ban the practice of short selling securities throughout the European Union. As noted in a joint letter from the two leaders of the largest European powers to the Chairman of the European Commission, Jose Manuel Barroso, the European Commission should ban short sales of a number of securities, as well as limit the number of swaps for outstanding credit obligations on government bonds of EU countries.

“The large-scale turmoil in financial markets that has occurred in recent months is of grave concern to EU countries, as well as to our citizens,” Angela Merkel and Nicolas Sarkozy said in a joint letter. In their opinion, there is now again significant market instability, and this raises fair questions. In particular, they relate to certain financial practices and the use of certain products. “We consider it imperative to increase the transparency of the process of short sales of shares and bonds, especially government domestic loan bonds,” the letter notes.

Last month, German financial regulator BaFin imposed a ban until March 31, 2011 on unsecured short sales of eurozone government bonds and related credit default swaps (CDS) on these bonds. BaFin also imposed a temporary ban on unsecured short sales of shares of ten German financial companies, including the Allianz insurance group, Commerzbank, Deutsche Bank, and exchange operator Deutsche Boerse.

Then the authorities decided to expand the ban on speculative transactions with securities of financial companies to all shares. As noted in the draft document of the Ministry of Finance, the program of measures aimed at stabilizing financial markets will include “a ban on unsecured short sales of shares, including derivatives on these shares.” According to some experts, the introduction of such measures unilaterally cannot ensure the achievement of serious results. However, experts now believe that the European authorities will support these initiatives. "I don't see any reason why these proposals can't be adopted soon," said London Business School economics professor Richard Portes. “If there is political will, why not implement it.” “It would be surprising if any European Commission proposals turn out to be softer than what Germany has introduced,” said Thomas Tindemanns, a lawyer at White&Case LLP.

Nikolay KOCHELYAGIN