(Reuters)
Updated: 2007-01-26 13:59

SHANGHAI - China's government on Thursday warned against the stock market rising too fast and reported higher-than-expected inflation, suggesting the benign conditions which buoyed Chinese markets last year could be about to change.

The stock and bond markets were awash in funds last year as China's record trade surplus of $177.47 billion produced big flows of money into the country, pushing Shanghai's composite index up 130 percent.

But Thursday's events suggested the environment this year might not be quite so positive, with authorities expected to take more steps to bring liquidity under control.

The benchmark Shanghai stock index tumbled 3.96 percent to 2,857.365 points, its sharpest fall since July, while the five-year government bond yield rose to 2.6218 percent, its highest level in two months.

"Overall liquidity in the markets will drop this year because of expected monetary tightening," said Dong Dezhi, analyst at Bank of China.

Stocks soared last year, lifting Chinese firms' domestic shares 50 percent or more above their foreign-listed shares. Authorities made no move to interfere with record amounts of money pouring into equities. 

But Xie Fuzhan, head of the National Bureau of Statistics, told a briefing on the economic data on Thursday that investors should be cautious -- the first such warning by a top economic official since the bull run began last May.

"If I have any advice or warning for stock investors, it is: please always remember there is risk in stock investment, and investors should be cautious entering the market," Xie said.

Although his warning was mild, it suggested authorities might now be happy to see an end to the bull run in order to avoid the formation of a dangerous bubble in the market.

This impression was strengthened by the China Banking Regulatory Commission, which told banks to prevent personal loans from flowing into stocks. Such investment is technically illegal, though previously the ban was not strictly enforced.

The amount of money that could be blocked from the market as a result is small compared to other fund sources, but the commission's order implied the government's attitude to the market was changing.

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