By Han Lei (Chinadaily.com.cn)
Updated: 2008-03-13 16:14

A man reads information on an electronic screen at a brokerage house in Shanghai March 13, 2008. China's main stock index tumbled below 4,000 points Thursday to close at 3971.26 points for the first time in seven months, hit by concern about inflation and the market's ability to absorb large new supplies of shares. [Agencies]

China's equity market was hit by a fresh wave of selling on Thursday, amid mounting concerns over accelerating inflation which may prompt further tightening measures by regulators.

The Shanghai Composite Index, the most widely watched indicator, fell 2.43 percent to close at 3,971.26 points, the first close below the 4000-point mark in seven months. The index is 35 percent below October's record intra-day high.

The gauge has lost 28 percent in two months, or 35 percent since peaking in mid-October due to a confluence of factors: a possible recession in the United States which is a key market for Chinese exports, speculations of tighter monetary policy and snowstorms that crippled a large part of the country.

What fuelled investors' anxieties is rising inflation that leaped 8.7 percent year-on-year in February, the fastest pace in nearly 12 years.

Investors feared the People's Bank of China (PBOC) might have to raise interest rates, which is usually the tool-of-choice for central banks in tackling rising cost of living. China has seen 6th rate hikes and 11 increases in bank reserve requirement since the start of 2007.

Those concerns were displayed by sharp declines in steel makers and real estate developers, among the companies most vulnerable to tighter economic policy.

"There is definitely room for further interest rates hikes," China's central banker Zhou Xiaochuan told a press conference last week, while promising to examine the pros and cons carefully.

Worries about corporate earnings, a key pillar of a bull market, especially those that rely heavily on exports, also weighed on the sentiment.

China's exports grew by a meager 6.5 percent in February, a much lower rate than January's 26 percent. That could spur worries that slowing US demand will hurt Chinese exporters and could wipe out thousands of jobs.