Chinese Credit Crisis Crushes Dow

Just as investors were coming to terms with the Fed's announcement last week, Wall Street got rocked again today. This time, China was to blame as the Shanghai Composite fell 5.3 % last night on concerns about a credit crisis across the Pacific. Investors are worried after interbank lending rates there topped 13% last week. Though they eased down to 6.5% today, today's selling was spurred by the Chinese government's decision not to intervene, blaming the problem on poor loan management by banks.

Markets in Europe followed suit as all three major indexes across the Atlantic fell more than 1%. Meanwhile, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) was down nearly 250 points at midday, but salvaged some losses to close down 140 points, or 0.9%. Bond rates, which are also troubling Wall Street by creating an uncertain interest rate environment, also jumped as the benchmark 10-year T-Note yield hit 2.66% at one point but cooled off later in the day. There were no economic reports on today's docket.

Always one of the Dow's most volatile stocks, Bank of America (NYSE: BAC  ) was at the bottom of today's heap of blue chips, down 3.1%, as the banking giant was feeling the pain from both China's credit crisis and rising interest rates at home. Homebuilders have gotten crushed as interest rates have gone up, with investors fearing that higher mortgage rates could cool off the housing recovery. B of A stands to lose out as well if home sales fall off as it's one of the country's largest mortgage providers, and its home loan rates have already risen accordingly. Likewise, the spike in Chinese interest rates could affect international borrowing as well.

Hewlett-Packard (NYSE: HPQ  ) were also having a rough time, falling 3% today. Ironically, HP would stand to benefit in a way from the issues in China as its biggest rival, Lenovo, hails from the Middle Kingdom. However, the Chinese market is also an important one for HP as strong networking equipment sales in China have been a rare bright spot, and HP is one of the few Dow stocks so it needs to hold on to its growth segments.

Among the stocks beating the drop today was Johnson & Johnson (NYSE: JNJ  ) , which finished up 1.7%. Though there was no company-specific news out on Johnson & Johnson, the health-care sector is more or less immune from today's development and the company may be getting a delayed bump from its purchase last week of Aragon Pharmaceuticals.

Early in Tuesday trading, the Shanghai index dropped more than 1%, but had recovered nearly all of its losses at the time of writing. Keep an an eye on that before U.S. markets open tomorrow as it could predict the Dow's Tuesday performance.