Chinese stocks sank more than 2 percent on Friday after the central bank announced another monetary tightening, and amid signs that some institutional investors were cutting exposure to the market.
Though many small, individual investors have stayed bullish, some institutions have been lightening stock positions moderately in the last few days, fearing stocks may pull back for the short term after the index more than doubled this year, traders said.
Two senior fund management sources told Reuters that China's national social security fund had over the past two days been reducing its stock portfolios, which are managed by local mutual fund houses.
The Shanghai Composite Index, which jumped 1.56 percent on Thursday to a record closing high, ended down 2.16 percent at 5,277.176 points. It hit an intra-day low of 5,269.250. Losing Shanghai stocks outnumbered gainers by 669 to 173, though in a sign that investors were not panicking, more than ten Shanghai shares rose their 10 percent daily limits while none dropped 10 percent. Turnover in Shanghai A shares rose to 185.3 billion yuan ($24.6 billion), near a ten-week high, from Thursday's 164.3 billion yuan.
After the close on Thursday, the central bank said it would lift bank reserve ratios by 0.5 percentage point. Data on Tuesday is expected to show August inflation at a new 10-year high, and this could be followed by an official interest rate hike. The index was down only 0.41 percent at midday, but tumbled in the last half-hour on talk that Beijing might announce fresh policies this weekend to cool the stock market.
One common rumour was that authorities might encourage big state-owned enterprises to sell some of their large shareholdings in listed firms, adding to the supply of equity. Especially before a key Communist Party congress in mid-October, traders do not believe authorities will permit any extended fall of the market.
But some see a good chance for the index to pull back as far as 5,000 points in coming weeks - which would still leave it at late August levels. Huaxia Bank was at one stage up its 10 percent daily limit for a second day on rumours and speculation - for example, some investors were betting Bank of Beijing's IPO, for which subscriptions will be taken next Monday and Tuesday, would attract interest in Huaxia since it was also based in Beijing. But the stock ended up only 4.10 percent at 22.08 yuan.
Steel stocks pulled back after helping lead the market up in the past few days. Baoshan Iron and Steel, which surged 2.35 percent on Thursday, fell 3.58 percent to 18.87 yuan. Auto shares outperformed on talk that August car sales were very strong, traders said. Shanghai Auto soared 8.85 percent to 27.42 yuan.
China Eastern Airlines jumped its 10 percent daily limit for the fifth straight day, to 15.47 yuan, after last weekend's news that Singapore Airlines and Singapore investment firm Temasek would buy a 24 percent stake in it for US $918 million.
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