Markets

Markets hit by policy fears, index drops 5.16%

By Li Xiang (China Daily)
Updated: 2010-11-13 09:28

An investor studies an electronic board at a brokerage house in Wuhan, Hubei province. China's stocks on Friday fell 5.16 percent to close at 2985.44 points. [Photo/China Daily]

Sharp decline reflects concerns over possible measures to curb rising inflation

BEIJING - The Chinese stock market suffered its worst decline in more than a year on Friday as fears of policy tightening triggered sell-offs in many sectors.

The Shanghai Composite Index dropped 162.3 points, or 5.16 percent, to close at 2985.44 points, the biggest single-day drop since July 2009. More than 140 stocks fell to their daily trading limit of 10 percent.

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Analysts said that the sharp decline reflected investors' fear over an imminent increase in the interest rate by the government, after the country's inflation rate jumped 4.4 percent year-on-year in October.

"The recent volatility in the market shows investors' increasing anxiety about a policy shift by the central bank toward tightening," said Zhang Qi, a Shanghai-based analyst at Haitong Securities.

"But there was a tendency to correction in the market after a quick and strong rally of 800 points from July's low level," he said.

Market watchers said that Friday's drop is unlikely to be the start of a bear market, but warned of greater volatility as there is widespread speculation that Beijing is poised to raise the interest rate for the second time this year to tackle rising inflationary pressure.

"The near-term risk-reward for this position also looks unappealing as we approach the year-end roll-off," US investment bank Goldman Sachs' analysts Robin Brooks and Dominic Wilson told Bloomberg.

The fall in the mainland's A-share market affected other Asian stocks with Japan's Nikkei Stock Average falling 1.4 percent and Hong Kong's Hang Seng Index down by 1.93 percent.

Analysts said that as the global economy remains in a fragile state of recovery the recent liquidity-driven rally in the stock markets is unlikely to be sustainable.

The government's growing concerns about the resurgent asset prices caused by the latest round of global quantitative easing was reflected in the People's Bank of China raising the required reserve ratio on Wednesday.

Officials from the central bank have repeatedly warned of the risk of rising inflation and asset bubbles and said they will continue to introduce tightening tools, including interest rate hikes to tame inflation.

However, some analysts insist that the long-term outlook for Chinese stocks remains favorable, as the country's growth is still robust and the government will be able to stabilize the markets from any underlying threats from rising inflation and asset bubbles.