Chinese share prices closed 5.25 percent lower on Thursday as investors fretted that a special treasury bond issue and plans to allow greater overseas investment will sap liquidity, dealers said. They said news that the Ministry of Finance will issue 500 billion yuan worth of special bonds soon, as the first tranche of a planned 1.55 trillion yuan offer, unsettled investors already wary about government intentions.
Investors have been nervous since the bond plan was approved last Friday as it could soak up liquidity as part of overall government efforts to cool the economy and the bourse.
The China Business News reported Thursday, citing an unidentified source, that the finance ministry has submitted an application for the first batch of special bonds to the State Council, or cabinet. No date for the sale was provided.
The remainder may be issued in two batches of roughly equal size, according to the operational needs of the soon-to-be-established foreign exchange reserve management agency and the market situation, the report added.
The benchmark Shanghai Composite Index, which covers both A- and B-shares listed on the Shanghai Stock Exchange, lost 200.29 points for the biggest one day fall since plummeting more than 8.0 percent on June 4. Turnover continued relatively low at 73.76 billion yuan (9.58 billion US dollars). The Shanghai A-share Index was down 210.82 points or 5.26 percent at 3,794.38 on turnover of 72.79 billion yuan and the Shenzhen A-share Index shed 66.93 points or 5.94 percent at 1,059.56 on turnover of 40.38 billion yuan.
The expansion of the scope of the Qualified Domestic Institutional Investor (QDII) program, which aims to allow domestics funds to invest overseas, also hit sentiment as another threat of capital outflows, dealers said.
The State Administration of Foreign Exchange was quoted by the official Xinhua news agency as saying that it will raise QDII quotas and revise rules soon covering domestic insurance funds' investment in overseas markets. "The market was worried about liquidity because of the QDII, special bonds, and massive share offers," said Cao Xuefeng, an analyst at West China Securities.
"Shares plunged when more investors panicked and rushed to cash out in late trade," Cao added. Yan Li, an analyst with Southwest Securities based in Beijing, said: "Investors are psychologically weak at the moment and maybe more suspicious than usual, which makes them quite sensitive to market-related news."
Market confidence had been shaky since the government moved to cool an overheated market in late May when it tripled the stamp duty on share transactions to 0.3 percent. Sentiment was badly hit then, with the main Shanghai benchmark index losing some 6.5 percent on May 30 and plunging 8.26 percent on June 4.
News that the government is urging some of the big Chinese companies listed in Hong Kong to return home to raise funds also has investors worried that a potential avalanche of new shares will dry up local funds. Dealers said the clear eagerness to get Chinese companies to list at home strongly suggests the government wants to ramp up the supply of shares so as to help curb the overheated market.
Despite the recent volatility China's bourses, the Shanghai Composite is still up nearly 40 percent for the first six months of the year, after climbing 130 percent in 2006, fuelled by the country's unabated economic growth. Steel stocks tumbled with Baoshan Iron Steel down 0.66 yuan or 5.79 percent at 10.74 while Shanxi Taigang Stainless Steel dropped 1.94 yuan or 9.39 percent to 18.71.
Financials fell sharply, with China Minsheng Banking Corp down 0.26 yuan or 2.28 percent to 11.14. The Shanghai B-share Index was down 8.23 points or 3.23 percent at 246.55 on turnover of 962.38 million US dollars and the Shenzhen B-share Index lost 20.51 points or 3.02 percent at 675.52 on turnover of 880.71 million Hong Kong dollars (114.38 million US dollars).