Shares in China and Hong Kong fell on Wednesday, led by banks and property stocks, as investors fretted that China's surprise reserve requirement increase could cool growth in the world's third-largest economy. China's benchmark Shanghai Composite Index closed down 3.09 percent on Wednesday in its biggest single-day percentage loss in seven weeks.
The index finished at 3,172.658, its lowest close since December 25. Hong Kong's benchmark Hang Seng Index fell 2.59 percent or 578.04 points at 21,748.60, its worst one-day percentage loss in six weeks. Turnover in Shanghai A shares was a relatively heavy 197 billion yuan ($28.9 billion), the highest since December 4, with losing stocks outnumbering gainers by 652 to 245.
In Hong Kong, market turnover rose to HK$97.62 billion ($12.59 billion), the highest since November 27, from Tuesday's HK$81.22 billion. The decision by the People's Bank of China on Tuesday to increase bank reserve requirements could signal an end to easy and cheap funding, putting pressure on the earnings of Chinese property and resources companies.
The surprise move is the strongest step to date by the central bank as it starts to normalise monetary policy from very loose conditions, with an eye towards reining in surging asset prices. Chinese banks fell, with ICBC, the world's largest lender by market capitalisation, extending early losses. Its Shanghai shares were down 4.68 percent, while its Hong Kong shares fell 3.58 percent to three-month lows.
China Construction Bank also hit a three-month low, shedding 3.89 percent in Hong Kong, while Bank of China was down 3.62 percent at a three-week low. Property stocks, a sector that has become an increasing focus of Beijing's efforts to stamp out runaway price rises, also dropped as an official vowed renewed attempts to curb speculation.
China Overseas Land fell 4.73 percent to a four-month low, and China Resources Land dropped 6.59 percent to a six-month low. The country's biggest property company, China State Construction Engineering Corp, lost 1.96 percent. Aluminium Corp of China Ltd (Chalco), the country's largest aluminium maker, was down 7.03 percent.
China Shenhua Energy, the nation's largest coal producer, slipped 3.54 percent. "The quicker-than-expected tightening is partly aimed at curbing excessive imports, while global commodity prices are at high levels," said Ren Chengde, senior stock analyst at Galaxy Securities in Shanghai.
The Shanghai Composite Index fell more than 20 percent at one point from its 2009 high of 3,478 points hit on August 4, raising the question of whether the market could take a hit of similar magnitude this time around. The Shanghai index has also been supported by market reforms, such as the launch of stock index futures and short selling, which indicate that authorities are reluctant to see any massive instability in the market.
"The fundamentals aren't the same as before (last August)," said Steven Lam, vice-president at Karl-Thomson Securities. "The tightening signals that the economy is recovering and the markets can bear the increase in the reserve requirement ratio." "Fund managers are doing some switching now," he said. "The consumption staples have only dropped a bit. They have very strong buying power, showing that capital is staying in the market."
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