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Shares drop in China after central bank tightens credit further

Nation's main stock index sees its biggest drop in a year amid increasing concerns about inflation.

June 11, 2008|Don Lee | Times Staff Writer

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%.

Japan's Nikkei-225 index dropped 1.1% after Monday's 2.1% decline. Taiwan's main index dropped 2.5%, and stocks in Australia were off 2.6%. India's main stock index ended 1.2% lower.

Shares in Shanghai were down about 0.5% in the morning session today. Other Asian markets were little changed.

Not long ago, China's stock market was rocketing. In October, the Shanghai composite index hit a record high of 6,092 points, but it fell nearly 50% in the next six months. After increasing complaints from investors, China's government cut a stock transaction tax in late April, a gesture that seemed to restore confidence and lead some to believe that the bear market was over.

But since mid-May, amid the country's struggles with the earthquake in Sichuan province and increasing inflation concerns at home and in Asian countries such as Vietnam, Chinese investors' sentiment has turned negative.

The central government's move to raise bank reserve ratios came after reports suggested growing inflationary pressure in the economy in recent months. China's inflation this year has been running at an annualized rate of more than 8%. Higher food prices have been the main culprit, but there are signs that prices of other goods are rising as energy and other commodity costs have surged.

"I feel very uneasy, painful and powerless," said Zong Jun, 27, an employee of a Shanghai investment company. He said the value of his stock portfolio fell 14% on Tuesday, to about $17,000 from a high of almost $29,000 less than a year ago.

Zong said government officials should take other measures to attack inflation, such as letting the Chinese currency appreciate faster, rather than continuing to tighten lending.

"Right now, even if the central bank lifts the reserve rate, there's still lots of capital in the market, and it won't really make a big change," Zong said. "I've decided to just wait and see how the market goes before doing anything."

Zhang Qi, an analyst at Haitong Securities Co. in Shanghai, said he was surprised by Tuesday's sharp drop. He and other analysts are expecting the government to report this week that the inflation rate declined slightly in May. What's more, Zhang said, there's been a decline recently in the nontradable shares that have flooded and weakened the market in prior months.

"The market is overreacting," Zhang said, noting that 99% of the 806 stocks on the Shanghai Stock Exchange fell Tuesday, with about 60% reaching the daily loss limit of 10%.

"It's almost as if confidence in the market has collapsed," he added. "Cries of discontent are rising all around in the market."

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don.lee@latimes.com

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Cao Jun of The Times' Shanghai bureau contributed to this report.

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