China's main stock index tumbled 7.73 percent on Tuesday, its biggest drop since June last year, after the central bank announced a harsher-than-expected tightening of monetary policy to fight inflation. Banks and property shares led the declines as buyers fled the market, fearing more action by the central bank in coming months.
Weakness in global equities markets, which are being hit hard by high oil prices, also dragged down Chinese stocks. The Shanghai Composite Index closed at 3,072.333 points, not far from the day's low of 3,045.058, leaving it 50 percent below last October's record peak. Tuesday's slide in the Shanghai and Shenzhen markets erased about $240 billion of value.
Losing Shanghai stocks overwhelmed gainers by 891 to 20, while more than 530 shares plunged their 10 percent daily limits. Turnover in Shanghai A shares was very thin at 60.3 billion yuan ($8.7 billion).
"Nobody dares to buy in a market like this - confidence is gone," said Chen Jinren, analyst at Huatai Securities, adding that the index had a good chance in coming days or weeks of testing its 13-month low of 2,990 points, hit on April 22.
The government intervened to support the market in April by cutting the stock trading tax, and many investors see a good chance of another rescue attempt - perhaps the long-delayed introduction of margin trade and securities lending, which would benefit brokerages and could draw some buyers back to the market.
But many analysts think high inflation, the prospect of more monetary tightening and poor supply/demand conditions for shares could continue to weigh on the market for months. "Official steps to help the market may not work," said Chen. Cao Xuefeng, analyst at Western Securities, said he believed authorities would do what was necessary to prevent financial market instability in the run-up to the Beijing Olympic games in August, a politically sensitive time.
But he and others said investors worried China could get caught up in a regional or global cycle of high inflation, tightening monetary policy and sliding equities prices.
The stock market crash in Vietnam, where inflation has been in the double digits, is receiving heavy Chinese media coverage and while the two economies are very different, investors are starting to draw parallels between the markets, Cao said. Sources familiar with the data told Reuters on Tuesday that China's May consumer price inflation, to be officially announced on Thursday, was 7.7 percent, down sharply from April's 8.5 percent.
But Zhang Qi, analyst at Haitong Securities, said this figure would not be low enough to reassure investors, especially as the central bank's aggressive monetary tightening suggested it was worried about a possible resurgence of inflation later this year.
The central bank said it would raise commercial banks' reserve ratios by a full percentage point in June, twice the hike which the market had expected. It is the first time since December that reserve ratios are being raised a full point within a single month. Even before the monetary tightening announcement, stocks had been under pressure from plans for a huge initial public offer by China State Construction Engineering Corp.