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China shares down 5.7 pc as panic mounts

business Updated: Jun 05, 2007 10:17 IST

Reuters
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China's main stock index plunged 5.66 per cent on Tuesday morning, bringing its losses since a hike in the stock trading tax last week to 20 per cent.

Panicking individual investors dumped small-capital speculative shares, while big drops in blue chips showed institutional investors were also selling to cut losses.

The Shanghai Composite Index briefly rose into positive territory in early trade but soon resumed sliding, ending the morning at 3,462.519 points. At one stage, it fell as much as 7.25 per cent.

"I have no words for this market -- it's out of its mind," said Wu Nan, an analyst at Xiangcai Securities.
"People had been expecting a rebound, but it didn't happen. And any rebound will just bring another sell-off, as confidence has gone."

Turnover in Shanghai A shares totalled 79.2 billion yuan ($10.4 billion) on Tuesday morning, down from last week's morning levels above 100 billion yuan, suggesting many stocks were finding few buyers even as they were marked down.

Falling stocks overwhelmed gainers by 855 to 37, with 375 shares in Shanghai tumbling their 10 percent daily limits.
A strong stock market is key to China's economic reforms, and authorities have repeatedly signalled that the tax hike was designed to cool the market, not to sink it. The index had nearly quadrupled since the start of 2006.

In an effort to restore investor confidence, the securities regulator approved four new equities investment funds, sources close to the regulator told Reuters late on Monday.

Quick profits

But that failed to reassure millions of individual investors who poured into stocks over the past several months in search of quick profits, and now want to get out with what they can.

The most heavily capitalised blue chips were not immune to Tuesday's falls, with oil refining giant Sinopec losing 7.99 percent to 12.56 yuan.

Many fund managers and analysts expect more official action in coming days to try to stabilise the market. The entrance of more mutual funds -- including foreign funds -- may be approved, and officials may publicly rule out further market-cooling steps.

Crackdowns on illegal trading and illicit financing of stock purchases may be put on hold. Authorities might even use their influence behind the scenes to try to coordinate a programme of institutional buying to support stocks.

Most analysts still expect the market to stabilise well before it does any serious damage to the economy, or begins to put any strain on the financial system, which is not very exposed to swings in stock prices.

Even a 30 per cent drop from the Shanghai index's all-time high -- a normal pull-back for a market in the context of an uptrend -- would still leave it more than 10 percent higher than it was at the start of this year.

Nevertheless, the losses of the past week could leave many shell-shocked investors reluctant to put money back into stocks for some months.

"Logically, there should be a rebound soon, but it's impossible to say how strong," said Great Wall Securities analyst Song Zhongqing.

Among the few rising stocks on Tuesday was Handan Steel, which climbed 2.51 per cent to 6.54 yuan after saying its parent had completed a 1.5 billion yuan plan to buy back shares in the listed unit. This suggested to some traders that the parent might buy more shares if the stock price sagged.