Chinese main stock index tumbled 4.56 percent on Tuesday, led down by financial and steel shares, after a slide by US stocks to 12-year lows increased fears over the global economy and markets. Auto shares outperformed on news of a Chinese government plan to strengthen the sector, which may involve mergers to cut the number of major auto groups.
The Shanghai Composite Index ended at a two-week closing low of 2,200.654 points, not far from the day's low of 2,193.268. Losing Shanghai A shares outnumbered gainers by 766 to 173, as turnover in Shanghai A shares rose to a very heavy 157.9 billion yuan ($23.1 billion) from Monday's 138.2 billion yuan. China Construction Bank sank 4.90 percent to 4.08 yuan and China Life Insurance lost 6.40 percent to 20.92 yuan.
CITIC Securities, which is the biggest listed brokerage and so is often seen as a barometer of the market's outlook, slid 9.83 percent to 22.42 yuan and Haitong Securities plunged its 10 percent daily limit to 12.33 yuan. The index has major chart support between 2,000 and 2,100 points, where it peaked repeatedly from November to January, and analysts said there was a good chance of that area being tested.
"The market has been hit by a couple of steep falls since last week, and each has erased several days of rises. This might drive some investors out of the market," said Huatai Securities analyst Chen Jinren. Many analysts think stocks' rally this year was to a large degree due not to reasonable expectations for an economic recovery, but to heavy inflows of money created by monetary easing and government pressure on banks to boost lending.
New bank lending is now expected to shrink from January's record levels, which could pressure the stock market. Merrill Lynch said in a report on Tuesday that excess money should keep China's stock market outperforming other markets, despite wobbles due to global events, until a Chinese economic recovery sucked liquidity out of stocks. But Stephen Green, economist at Standard Chartered Bank, said stocks appeared to be on shaky foundations.
"This slowdown may already be happening. Given the weak state of profits, most serious observers doubt that there is much foundation to the recent stock market boom." Green added, however, that a sharp slowdown in February loan growth could pressure the central bank into easing monetary policy again, and this might cause a second wave of liquidity into stocks.