China stocks slide 7.7 pct on monetary tightening

SHANGHAI (Reuters) - China's main stock index tumbled 7.73 percent on Tuesday, its biggest drop since June last year, after the central bank announced a harsher-than-expected tightening of monetary policy to fight inflation.

Banks and property shares led the declines as buyers fled the market, fearing more action by the central bank in coming months. Weakness in global equities markets, which are being hit hard by high oil prices, also dragged down Chinese stocks.

The Shanghai Composite Index (.SSEC) closed at 3,072.333 points, not far from the day's low of 3,045.058, leaving it 50 percent below last October's record peak. Tuesday's slide in the Shanghai and Shenzhen markets erased about $240 billion of value.

Losing Shanghai stocks overwhelmed gainers by 891 to 20, while more than 530 shares plunged their 10 percent daily limits. Turnover in Shanghai A shares was very thin at 60.3 billion yuan ($8.7 billion).

"Nobody dares to buy in a market like this -- confidence is gone," said Chen Jinren, analyst at Huatai Securities, adding that the index had a good chance in coming days or weeks of testing its 13-month low of 2,990 points, hit on April 22.

The government intervened to support the market in April by cutting the stock trading tax, and many investors see a good chance of another rescue attempt -- perhaps the long-delayed introduction of margin trade and securities lending, which would benefit brokerages and could draw some buyers back to the market.

But many analysts think high inflation, the prospect of more monetary tightening and poor supply/demand conditions for shares could continue to weigh on the market for months. "Official steps to help the market may not work," said Chen.

GLOBAL CYCLE
Cao Xuefeng, analyst at Western Securities, said he believed authorities would do what was necessary to prevent financial market instability in the run-up to the Beijing Olympic games in August, a politically sensitive time.

But he and others said investors worried China could get caught up in a regional or global cycle of high inflation, tightening monetary policy and sliding equities prices.

The stock market crash in Vietnam, where inflation has been in the double digits, is receiving heavy Chinese media coverage and while the two economies are very different, investors are starting to draw parallels between the markets, Cao said.

Sources familiar with the data told Reuters on Tuesday that China's May consumer price inflation, to be officially announced on Thursday, was 7.7 percent, down sharply from April's 8.5 percent.

But Zhang Qi, analyst at Haitong Securities, said this figure would not be low enough to reassure investors, especially as the central bank's aggressive monetary tightening suggested it was worried about a possible resurgence of inflation later this year.

The central bank said it would raise commercial banks' reserve ratios by a full percentage point in June, twice the hike which the market had expected. It is the first time since December that reserve ratios are being raised a full point within a single month.

Even before the monetary tightening announcement, stocks had been under pressure from plans for a huge initial public offer by China State Construction Engineering Corp.

The IPO could raise some $6 billion in Shanghai this month, making it China's largest IPO so far this year, and investors fear the market may have trouble absorbing the fresh equity.

ICBC, VANKE PLUNGE
Industrial and Commercial Bank of China (601398.SS), the biggest bank, tumbled 8.35 percent to 5.38 yuan on Tuesday while the largest listed property developer, Vanke (000002.SZ), plunged its 10 percent limit to 17.70 yuan.

Top oil refiner Sinopec (600028.SS) sank 8.39 percent to 12.34 yuan after the head of the State Energy Bureau said the government had postponed plans for energy price reform.

This was taken as a sign that due to the inflation threat, the government would not permit Sinopec to raise domestic fuel prices any time soon, and that its refining margins would therefore stay under pressure. (for story, click on

China United Telecommunications (600050.SS), the most active stock, dropped 8.46 percent to 7.57 yuan after falling 15.81 percent over the previous four sessions in the wake of a restructuring announcement by Hong Kong-listed affiliate China Unicom (0762.HK).

Among gainers, FangDa Carbon New Material (600516.SS) rose 1.86 percent to 17.49 yuan after forecasting net profit in the first half of 2008 would soar over 500 percent.