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Home >> Business
UPDATED: 10:21, July 03, 2007
Market up slightly in thin trading
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Heavy buying of financial stocks yesterday lifted the mainland stock market to end 0.41 percent higher after it dropped as much as 2.5 percent at mid-afternoon on lingering fears that a special bond issue may draw liquidity out of the market.

The Shanghai Composite Index closed at 3,836.29 points on the first trading day of July. Turnover in Shanghai A shares was low at 88.6 billion yuan, down significantly from Friday's already-thin 103.7 billion yuan and only one-third of the daily record of 267.5 billion yuan hit on May 30.

Analysts said that yesterday's trade revealed fear about future government moves lingers in the market and will continue for a time.

"It is the uncertainty about the central bank's further money-tightening policies -including when and how many special bonds purchased from the Ministry of Finance the central bank will sell - hurt the market's confidence," said She Minhua, an analyst with CITIC China Securities.

On Friday the Ministry of Finance said in a statement that it would issue 1.55 trillion yuan in special treasury bonds directly to the central bank in exchange for part of the $1.2 trillion in foreign currency reserves under the central bank's control, bonds the central bank can later sell on the market.

"The Ministry of Finance said that it would directly sell the 1.55 trillion yuan in special bonds to the People's Bank of China (PBOC) instead of on the financial market. This private placement gives the central bank a very flexible and effective tool for further liquidity control," said Zhang Qunqing, an analyst with Shihua Financial Information, a Beijing-based financial information provider.

Currently the central bank's liquidity control measures are limited to issuing central bank bills, hiking interest rates and increasing bank reserve ratios, but all three measures have side effects and must be used within limits.

"The purchase of the special bonds from the Ministry of Finance gave the central bank a very good measure to mop up liquidity, which will not add extra costs," Zhang said.

No specific timetable has been announced for sale of the bonds, but according to Wang Qing, chief economist of Morgan Stanley, upcoming bond issues will likely be released in batches that could be timed with maturity dates of outstanding PBOC bonds to minimize the impact on market interest rates.

Source: China Daily

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