SHANGHAI — China's main stock index plummeted 7.7% on Tuesday, its biggest drop in a year, leading a second straight day of broad declines in Asia amid worries over inflation and slower economic growth.
The 257-point loss brought the Shanghai composite index to 3,072 points, the lowest close since March 2007. Analysts said the primary catalyst was another round of credit-tightening measures by China's central bank, which sees inflation as a serious threat to one of the world's largest and fastest-growing economies.
China's central bank on Saturday raised the reserve requirement for banks, which means they have to set aside more reserves as a percentage of deposits, making less money available for loans. It was the fifth such move this year. Stock markets in China and Hong Kong were closed Monday for a holiday, so Tuesday was the first chance they had to react.
"I think the decline today is a sign that [China's] economic growth will slow down -- or at least that is the signal that government wants to give by lifting the deposit reserve to a historically high level," said Chen Wei, a director at Shenzhen Eastern Bay Investment Management Co., a private equity firm in Shanghai. However, he added: "In many cases, individual investors, as well as many fund investors, are making investment decisions out of panic."
The decline Tuesday was the Shanghai market's biggest since an 8.3% drop in June 2007. In February of that year, the index tumbled 8.8%, helping trigger a temporary global sell-off.
The drop cast a heavy pall over other Asian markets, which had retreated Monday in reaction to a sharp pullback Friday on Wall Street precipitated by a surge in oil prices and rise in the U.S. jobless rate. Although the Dow Jones industrial average recovered a bit Monday as crude prices eased, that wasn't enough to soothe investors in Asia.
"As Shanghai's composite index went into a free fall, the [South Korean market] began to decline sharply," said Lim Chang-gue, head of global investment at Samsung Investment Trust Management in Seoul. South Korea's main stock index slipped 1.9% on Tuesday after sliding 1.3% on Monday. China is South Korea's largest trading partner, Lim said, so a slowdown in China's growth would be "absolutely negative to Korea."
China's smaller Shenzhen market plunged 8% and Hong Kong's Hang Seng index, which includes many Chinese companies, lost 4.2%.
