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Market falls 4.5% amid rate-hike speculation, 04/19

By Zhang Ran (China Daily)
Updated: 2007-04-20 10:05

Fears that the central bank would hike interest rates led to a 4.52-percent drop in the stock market yesterday.

The figure represents the largest daily drop in the major index since February 27 when it fell nearly 9 percent.

The Shanghai Composite Index fell 163 points to end at 3,449.016 yesterday, amid strong speculation thatmacroeconomic data for March might reveal an overheating economy and prompt the central bank to hike interest rates.

Indeed, the data revealed that the economy registered growth of 11.1 percent in the first quarter and the March Consumer Price Index (CPI) grew by 3.3 percent year on year. The government announced the figures after the market closed yesterday to weaken its impact on the market.

Zhang Qi, an analyst with Shanghai-based Haitong Securities, said: "Investors are worried the government may take serious measures to cool the economy, especially the current excessive liquidity."

Investors in Zhengzhou, capital of Central China's Henan Province, study the stock index boards yesterday.

The Shanghai Composite Index climbed as much as 11 percent between April 2 and Wednesday.

Ma Jun, chief economist and Greater China head of Deutsche Bank Hong Kong, said: "The A-share market completely ignored the recent central bank rate hike and reserve requirement increase. As the Shanghai composite index approaches 4,000, we think the government will have no choice but to step up efforts to deflate the bubble."

Ma predicted that the central bank would raise the reserve requirement ratio and hike rates at a pace faster than market expectations. He said the government might also take other regulatory actions. The State Administration of Foreign Exchange, he said, may strengthen efforts to stop illicit foreign fund inflows, the China Securities Regulatory Commission's could probe for insider trading practices and price manipulations, and the China Banking Regulatory Commission may take measures to prevent illegal funding of stock investments.

But some fund mangers raised doubts whether a new rate hike would have a sustainable effect based on past results.

A Beijing-based fund manager, who declined to be named, said that the market had no reason to drop under 3,300 points.

"Many investors will take today's market correction as an opportunity to buy in," he said.

"Despite an interest rate hike, the market situation is different to what it was in February. With so many new funds pouring into the market, it has no reason to drop under 3,300 points," he said. "It would not repeat the bad performance of February 27."

Both the trading volume and the number of participants in the A-share market are growing by the day.

Figures from the China Securities Depository and Clearing Co Ltd showed that since April 11, the number of new accounts opened by investors was averaging more than 200,000 a day.

Industry insiders said the most money poured into the market on a single day was 10 billion yuan ($1.3 billion).

"With the support of strong company performances in the first quarter, an interest rate rise is still foreseeable," Haitong Securities' Zhang Qi said.