LONDON — Global stock markets reeled Monday amid concerns that credit conditions will tighten in the U.S. and China, the world's two largest economies.
Shanghai's stock index endured its biggest loss in four years after the country's central bank allowed commercial rates to spike higher. Analysts say the move 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 the higher lending rates could also hurt economic growth. The impact for stock markets would be all the greater if the U.S. Federal Reserve tightens its own ultra-loose monetary policy over the coming months, as it has signaled it would do so long as the U.S. economy improves according to its forecasts.
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.
In Europe, Britain's FTSE 100 fell 1.2 percent to 6,040.44 and France's CAC-40 slid 1.6 percent to 3,599.05. Germany's DAX was down 0.9 percent to 7,717.43 even though a key business sentiment index rose slightly, suggesting the recovery in Europe's largest economy continues, though at a slow pace.
Wall Street opened lower, with the Dow Jones industrial down 1.6 percent to 14,563.29 and the S&P 500 down 1.7 percent to 1,564.91.
Government bond yields rose in the U.S. and other big economies on expectations that borrowing rates would not remain at their current lows for much longer. The U.S. 10-year rate traded above 2.6 percent for the first time since August 2011.
Bond yields also rose in Europe's financially shaky countries, suggesting investors are relatively more cautious about lending them money despite the good returns they provide. Spain's 10-year bond yield was above 5 percent for the first time in three months.
Analysts at Moody's Investors Service said they saw the Chinese central bank's action to allow lending rates to rise as "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 are concerned 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.
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 up 8 cents to $93.77 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.71 to close at $93.69 on Friday.
In currencies, the euro fell to $1.3091 from $1.3139 late Friday in New York. The dollar fell to 97.33 yen from 97.76 yen.
Sampson reported from Bangkok. Joe McDonald in Beijing and Fu Ting in Shanghai also contributed to this report.