An investor monitors stock price movements at a brokerage firm in Changchun, Northeast China's Jilin Province July 4, 2007. [newsphoto]

China's main stock index tumbled more than five percent on Thursday, continuing a two-week downtrend that analysts said heralded a medium-term correction, as new listings add to share supplies and a special bond issue threatens to pull liquidity from the market.

Large-cap blue chips, such as Aluminum Corp. of China Ltd. (Chalco) , led the fall after outperforming the market and lending the index some support during recent pullbacks, indicating investor sentiment was worsening.

"With huge new share supplies pouring into the market and under the pressure of the upcoming special bond issuance, investors see no hope for the market to reverse its recent weakness in the near term," said Zheng Weigang, senior analyst at Shanghai Securities.

The Shanghai Composite Index fell 5.25 percent to close at 3615.87 points.

Turnover in Shanghai A shares was light at 75.76 billion yuan, suggesting many investors were staying away from the market.

Fund managers said they expected the index to continue to fall in the short term but believed it would find support at its recent low of 3,404 points hit on June 5, several days after the finance ministry announced a tripling of the stock trading stamp tax.

FINANCIALS HIT

Chalco, the world's number four aluminium producer, was the biggest index mover and one of the most active issues, slumping its 10 percent limit to 19.96 yuan. The stock was hit by profit-taking after a recent run-up on news of its plan to take its unit Baotou Aluminum private.

Financials were among the worst-performing sectors. Bank of Communications fell 5.69 percent to 10.45 yuan and Bank of China lost 3.19 percent to 4.86 yuan.

The government is accelerating its approval of initial public equity offers, which is dampening market sentiment due to the prospects of an increased supply of shares in the market.

City lenders Bank of Nanjing and Bank of Ningbo said on Wednesday they would launch IPOs of domestic A shares next week. Analysts expect them to raise a combined $1.8 billion.

A slew of large companies listed in Hong Kong, including PetroChina , China Construction Bank and Shenhua Energy , have announced plans for large stock offers on the mainland's stock market, expected to raise between 200 billion and 300 billion yuan in the next two or three months.

Media reports said on Thursday the Ministry of Finance would soon kick off the sale of 500 billion yuan in special bonds, as the first batch of its planned 1.55 trillion yuan special bond issuance.

The proceeds will be used to fund the establishment of a state investment agency, which will help to invest part of China's ballooning foreign exchange reserves, the world's largest, in overseas markets.

Half of stocks fall more than 30% in past month

China's stock market has been highly volatile and seen big losses since the stamp tax hike on the night of May 29.

Almost half of the yuan-denominated A-shares in the Shanghai and Shenzhen stock exchanges fell more than 30 percent in the past month, the Shanghai Security News reported Thursday.

During the period, the key indexes for the two bourses dropped 12 percent and seven percent, respectively. Most of the stocks fared worse than the market, .

Forty-five percent of the total, or 653 stocks dropped more than 30 percent; 901 stocks, or 62 percent, were down more than 20 percent; and 53 declined more than 50 percent.

Bucking the trend, another 167 stocks saw a rise over the closing price on May 29, with 73 of them jumping more than 10 percent. These shares include Shandong Gold, Yunnan Copper and Baotou Aluminum.