Mainland stocks slump amid liquidity fears

PUBLISHED : Tuesday, 01 September, 2009, 12:00am
UPDATED : Tuesday, 01 September, 2009, 12:00am

Mainland stocks dropped to a three-month low yesterday, adding to evidence that investors were growing tired of pinning their hopes on another Beijing rescue package.

The Shanghai Composite Index tumbled 192.943 points or 6.74 per cent to 2,667.745, taking last month's plunge to 21.8 per cent, the biggest monthly decline since October last year. It was also the second-biggest monthly loss in 15 years.

Worries of a liquidity drain mounted over the weekend as investors realised banks were tightening previously easy credit and the market regulator indicated it would not slow down initial public offerings.

'It is not realistic to expect a turning point,' said Shenyin Wanguo Securities analyst Qian Qimin. 'The downward spiral will continue.'

The key index has retreated 23.1 per cent from this year's high of 3,471.44 points set on August 4, as a sharp fall in loans last month triggered panic selling.

The China Banking Regulatory Commission had stepped in to control the pace of lending amid concerns about soaring bad loans, said banking officials who were informed of the so-called 'window guidance' - an administrative tool used to instruct company executives to comply with government directives.

By August 4, the benchmark had umped more than 90 per cent from last year's close, buoyed by an influx of speculative capital.

The China Securities Regulatory Commission approved a large initial public offering by Metallurgical Corp of China last week, exacerbating the weak sentiment.

A retail investor surnamed Guo said yesterday smaller investors believed the authorities had failed to react quickly enough to the recent equity rout. 'They lacked a political sense. But eventually, they will be called into action by the central leadership to boost investor confidence,' he said.

A combined 250 stocks on the Shanghai and Shenzhen exchanges fell by their daily trading cap of 10 per cent yesterday, a sign selling pressure was heavy and the downward momentum would continue.

Analysts predicted the main index would fall below the 2,500-point level in the coming days as skittish investors rushed to pare holdings.

Hong Kong stocks also slid yesterday as investors tracked the heavy sell-off across the border, dragging the Hang Seng Index to its first monthly decline since February.

The benchmark dived 374.43 points or 1.86 per cent to 19,724.19, extending losses to a third consecutive session.