Dragged down by fears of monetary tightening and heavy supplies of new shares, China's main stock index ended June with a drop of 20.31 percent over the month, its largest monthly fall since 1994.
The Shanghai Composite Index slipped 0.45 percent to a new 16-month closing low of 2,736.103 points on Monday, after bouncing from a fresh 16-month intra-day low of 2,693.404. As most buyers stayed away from the market, daily turnover in Shanghai A shares shrank to 40.4 billion yuan ($5.9 billion), its lowest level since December 2006, from 61.4 billion yuan on Friday.
On a quarterly basis, the Shanghai index lost 21.21 percent in the second quarter of this year after sliding 34.00 percent in the first quarter. It is now 55 percent below its record high, hit last October.
Gaining Shanghai stocks outnumbered losers by 480 to 389 on Monday, and on a closing basis, the index held technical support at 2,723-2,732 points, the late February 2007 and March 2007 lows. It tested and held that support area repeatedly in June.
But analysts said that given the strength of the bear market in Chinese stocks, a further, substantial drop by the index was quite possible in coming weeks. "The market still hasn't found a floor. The outlook for the second half of this year is poor," said Zhang Yanbing, analyst at Zheshang Securities. Technically, any clean break of the 2,723-2,732 area could point the index down to the February 2007 low of 2,541 points.
A monthly Reuters poll of China mutual funds, published on Monday, found them cutting their average recommended allocation to equities in a balanced portfolio to 72.8 percent - down from 76.5 percent last month and the second-lowest level since Reuters launched the poll in June 2007. Four of the nine funds predicted the index would fall further in the next three months, to 2,500 points.
The index tumbled 5.29 percent on Friday on rumours that the central bank might soon hike interest rates to fight inflation. A rate hike did not happen at the weekend, but comments by central bank governor Zhou Xiaochuan did not reasure the market. Zhou said inflation could slow this summer but inflationary pressure would remain, and global monetary policy needed to tackle inflation even if it were driven by food and energy prices.
Meanwhile, China's securities regulator was due late on Monday to consider a 10 billion yuan IPO application by Everbright Securities, and an 8.97 billion yuan IPO application by China South Locomotive & Rolling Stock Corp. These threaten to increase the supply of shares at a time when the market is in a poor condition to absorb fresh equity.
"The market worries that brokerage houses are lining up to apply for IPOs. Everbright may trigger more listings," said Zhang at Zheshang Securities. Brokerage shares fell sharply on Monday because of the prospect of expanded supply. CITIC Securities sank 2.57 percent to 23.92 yuan.
Oil refiner Sinopec was one of the biggest blue chip losers on Monday because high crude oil prices hurt its refining margins. It slipped 1.17 percent to 10.15 yuan, extending a 9.12 percent plunge on Friday. Among gainers on Monday were Shanghai-related stocks, after Hong Kong's Wen Wei Po newspaper quoted unnamed sources as saying that after years of talks, Chinese authorities had finally reached an agreement with Walt Disney Co to build a Disneyland in the city, and would announce a deal after next month's Olympics.
Some other Shanghai-related shares also soared, with Lujiazui Finance & Trade Zone Development up 10 percent to 13.61 yuan and Shanghai taxi operator Haibo rising 10 percent to 5.12 yuan. Airline shares soared in afternoon with China Southern Airlines up 4.86 percent to 7.12 yuan despite a planned hike in domestic jet fuel prices. Traders said that after a sharp fall in recent weeks, the sector may have drawn some buying on valuation grounds.
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