THE worst financial crisis in the United States since the 1930s is taking its toll on Chinese mainland institutions.
Plunging stock markets on China's mainland, sudden cut in lending rates, concerns over banks' shrinking profits and jittery policyholders were the hallmarks of this past tumultuous week.
The financial crisis that originated in the US 13 months ago entered a dramatic phase, pushing China's central bank and other regulators to take action to rescue the flagging stock market on Thursday.
Last Monday, Lehman Brothers Holdings Inc, which survived railroad bankruptcies of the 1880s, the Great Depression of the 1930s and the collapse of hedge funds Long-Term Capital Management a decade ago, filed for bankruptcy after record losses in the mortgage market.
Merrill Lynch, another Wall Street investment bank giant, hocked itself in a quick-fire sale to rival Bank of America.
In another shocker, American International Group had to be bailed out by the Federal Reserve for US$85 billion.
The reason: In addition to its traditional role of insurer, AIG had guaranteed hundreds of billions of dollars' worth of financial products whose value had plunged.
The impact of these developments was swift and ruthless.
The global stock market started shedding relentlessly, and the already flagging Chinese mainland markets were no exception.
Though the market was closed for trading last Monday for the Mid-Autumn Festival, it went into a free fall for three days after it opened.
The benchmark Shanghai Composite Index ended at 2,075.09 on Friday, about one-third from its peak of 6,124.04 last October.
The central government took matters in hand on Thursday and introduced a slew of measures to revitalize the depressed market. It scrapped the stock-purchasing stamp duty and announced that Central Huijin would buy into the big-three state-owned banks to stabilize their shares. The index skyrocketed on Friday, almost hitting the 10-percent daily trading cap.
State initiatives
Huijin, China's state investment vehicle, will buy shares of Industrial and Commercial Bank of China, Bank of China and China Construction Bank on the secondary market.
The state initiatives helped reduce the pressure banks suffered from their investments with Lehman.
So far, five banks - ICBC, BOC, China Merchants Bank, Industrial Bank and Bank of Communications - have disclosed their exposure to Lehman, which is a total of US$454.24 million.
"Huijin's purchase sends a strong signal to the market that the state-owned banks' exposure to Lehman is limited. The message that went out was Huijin won't buy shares of companies with big problems," said She Minhua, a China Securities Co analyst.
But analysts said the move was purely psychological. Feng Wei, a Sealand Securities Co analyst, said the neutral rating of the banking sector remained unchanged after the Huijin announcement.
The People's Bank of China last Monday announced that it would lower the base interest rate for one-year loans by 27 basis points, or 0.27 percentage points, to 7.2 percent.
The central bank also cut the reserve requirement ratio by 1 percentage point for banks other than the six largest depository institutions - ICBC, Agricultural Bank of China, BOC, CCB, BoCom and Postal Savings.
It is the first lending-rate cut in six years and the first scale-back of reserve requirement in nine years.
Future uncertain
"PBOC's decision to cut lending rates and lower reserve requirement ratio for smaller banks was clearly aimed at bringing relief to certain sectors. But the announcement on a public holiday was probably triggered by Lehman and Merrill Lynch developments in the US," said Citibank in a research note.
"The timing of the announcement was surprising, as it came on a public holiday in China," said Citibank.
"The authorities were already fine-tuning some of these measures, including relaxation of credit quota and increase in export tax rebate. But the latest development in the US financial market probably precipitated action in China," the note said.
Lending-rate cuts were greater for shorter-term loans. The six-month rate was reduced by 36 basis points to 6.21 percent, while the five-year-plus rate was cut only 9 basis points to 7.74 percent. The uneven reduction was probably intended to ease short-term liquidity constraints and restrictions on the working capital of companies.
Deposit rates have not been changed, probably in an effort to keep consumer sentiment up. Inflation rates are still higher than the nominal returns on deposits.
However, the lending-rate cut and the effort to free up more capital didn't act as a shot in the arm for investors in the stock market.
The central bank's action was interpreted to mean that the worst was yet to come.
Instead, the latest series of actions came a blow to the banking industry - deposit rates stayed put, while lending rates were chopped. The interest spread - the main profit contributors for Chinese mainland banks °?°?- is thus being squeezed.
"The banking sector is facing challenges of shrinking interest spread and increase in credit cost," said Qiu Zhicheng, a Haitong Securities Co analyst.
"The slowdown of the economy will lead to the deterioration of lending quality. This will be a bigger problem for banks than the panic sentiment from the Lehman exposure," he said.