Monetary tightening sinks China stocks

15:20, May 06, 2010      

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Stocks in Shanghai and Shenzhen tumbled Thursday, as investors were unnerved by the central bank's ever-tightening monetary hand to rein in credit supply.

The uncertainties in Greece's debt woes and a possible contagion spreading to other Eurozone economies with untold fiscal troubles also battered the feeble confidence of investors here in China.

A ferocious sell-off was seen in the afternoon trading as investors are worried about much lower profits, if any, for China's property developers as the country has launched a fierce battle to drag down the prices, which could stoke fears of a big burst later, and ruin the world's major emerging economy.

The Shanghai composite stock index lost 117.45 points, or 4.11 percent, and closed at 2739.40 points, the lowest in a year. The Shenzhen index dived 581.17 points, or 5.28 percent, the largest single drop this year.

To unwind a fairly easy monetary policy which China implemented in late 2008 to fight then global financial crisis, the central bank decided to raise reserve minimum of commercial banks to 17 percent on May 10. The move is expected to take back 300 billion yuan from market as reserve at the central bank.

To further curb liquidity and restrict the risks of a run-away urban property market, the central bank issued 110 billion of 3-year bonds Thursday, in addition to 14 billion short-term 3-month bonds, to lock up more funds to restrain credit.

The measure, announced just 4 days after the raising of reserve requirement, is verification that the authorities are getting more serious in retrieving credit and curb inflation, analysts say.

As China's economy rose by 11.9 percent in the first quarter this year, China's regulators become more concerned with inflation and asset bubbles. Housing prices, which rose precipitously in the first three months, are what China's homebuyers irk most and have stoked concerns of a property boom-bust cycle, Chinese style.

Bank and property stocks led Thursday's slump. The China Merchant Bank, the fifth largest in the country, lost 0.64 yuan or 4.59 percent. The Vanke Co. Ltd, the largest real estate developer, dived 0.31 yuan, or 4.14 percent.

People's Daily Online


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