China's main stock index fell more than 2 percent on Monday and turnover in Shanghai A shares shrank to its lowest level since December 2006 as concern about the slowing economy continued to drive investors from the market.
News that 16 police officers were killed in a grenade attack in China's restive far north-western region of Xinjiang caused shares in companies based in the region to tumble, further weakening the overall market. The Shanghai Composite Index ended down 2.14 percent at 2,741.740 points, near its intra-day low of 2,738.850.
Turnover in Shanghai A shares shrank to 37.4 billion yuan ($5.5 billion) from Friday's 50.6 billion yuan. Losing Shanghai A shares outnumbered gainers by 764 to 165. Steel shares, which have been sliding since early last week because of concern that a slowing economy could dampen product prices, led the drop. Industry leader Baoshan Iron & Steel lost 4.92 percent to 7.54 yuan, after falling 7.79 percent last week.
Among Xinjiang-based companies, Xinjiang Ba Yi Iron & Steel Co lost 8.38 percent to 9.05 yuan, while Xinjiang Urban Construction (Group) Co tumbled 9.72 percent to 5.24 yuan. Regional Chinese stocks often react as a group to negative news from their regions, only for many of them to recover in subsequent days as it becomes clear the companies are not directly affected.
However, many analysts said the overall market could remain sluggish and turnover thin in coming days. "Sentiment is not good and people are reluctant to trade as it is hard to make money, plus there's uncertainty about what will happen after the Olympic Games," said Zhang Qi, analyst at Haitong Securities. Many investors believe authorities do not want the market to fall sharply during this month's Beijing Olympics, which is a politically sensitive period.
But they worry that stocks could resume a downtrend after the Olympics because of the economic outlook and large supplies of fresh equity due to expiring lock-up periods. In an apparent effort to allay such fears, the Financial News, a newspaper run by the central bank, on Monday carried a commentary by one of its reporters saying it was irrational to expect a stock market downturn after the Olympics because the government would act to stabilise the market and sustain fast economic growth.
In one positive signal, the asset management arm of Belgian financial services provider KBC Groep was told by the foreign exchange regulator on Monday that it was being given a $150 million quota to invest in China's capital markets under the Qualified Foreign Institutional Investor (QFII) scheme, a source with direct knowledge of the matter told Reuters.
Some fund managers think other such quotas could be awarded in coming days as part of official efforts to improve market sentiment during the Olympics. But the quotas do not necessarily mean any immediate campaign of aggressive buying of Chinese stocks by foreign funds.
Among other losing stocks, LuThai Textile slid 9.91 percent to 8.00 yuan on Monday because of concern that a weak global economy would hurt its business, even though the company said last Friday's hike in textile export tax rebates would add 21 million yuan to its net profit in 2008. In 2007, net profit was 460 million yuan.
But Wuliangye Yibin jumped 5.67 percent to 21.98 yuan after saying it would use its own resources to buy a range of production assets from its parent for an unspecified sum. This appeared to be the first step in Wuliangye's previously announced plan to buy more than 6 billion yuan of assets from its parent by end-2010.
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