Reporting from Beijing —
China's leading stock exchange continued its long slide Tuesday, tumbling to its lowest close in seven months after the central government introduced another measure over the weekend to try to slow the nation's surging economy.
The Shanghai composite index, which was closed Monday for Labor Day, fell 1.2% in response to a central-bank announcement Sunday that it would require Chinese banks to increase the amount of capital they hold in reserve, the third such increase this year.
The move signaled another attempt by policymakers to keep a lid on inflation and cool a red-hot real estate market that some fear is headed for a U.S.-style meltdown.
China's economic output grew 11.9% in the first quarter, stoking fears that the economy is overheating.
The People's Bank of China will raise the reserve requirement ratio for major banks by half a percentage point. The directive, which takes effect Monday, means institutions will have to maintain 17% of their deposits as reserves, leaving them less money to lend.
Bank and property shares posted losses Tuesday on the Shanghai stock exchange, which fell 1.2% to finish trading at 2,835.28 points. The bourse is down 13% this year, making it one of the worst-performing stock indexes in the world over that period.
Investors were rattled last month when the central government unveiled rules to crack down on property speculation. Those included requirements for higher down payments on second homes and new powers for banks to deny loans.
"Investors can feel the government tightening policies," said Chen Wenzhao, an analyst at China Merchant Securities. "In the short term, it will be hard for the stock market to rebound. You have to wait and see the impact of the new measures. In China, government policy always leads the market."
Some analysts believe that the new reserve requirements will do little to tame inflation and that the government will soon have to take more forceful measures such as hiking interest rates.
Savings account yields are so paltry in China that many consumers have opted instead to borrow money and invest in the nation's booming real estate sector.
Pressuring banks and hiking reserve ratios "alone will become obviously inadequate very soon," said Jun Ma, chief China economist for Deutsche Bank. "These policy tools are helpful in controlling liquidity and loan growth but are not immediately effective in dealing with negative real interest rates, inflation expectations and spot prices. Within a few months, the government will have very few choices but to resort to rate hikes and some price controls."
Tommy Yang in the Times' Beijing bureau contributed to this report.