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September 1, 2009

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Stocks dive on fears of tighter credit

CHINESE shares slumped yesterday by the most in 14 months as investors worried about a liquidity drain after media reports revealed bank lending continued to shrink last month following tightened credit oversight.

The tumble came despite news of improved corporate earnings and speculation that the government may act to stabilize the market, indicating investor sentiment remains weak, analysts said.

"Confidence has yet to recover," said Lu Zhiwen, a China Galaxy Securities Co trader. "Concerns are mounting that liquidity will dry up as it will apparently be harder for bank credit to make its way into the stock market in the second half."

The Shanghai Composite Index plummeted 6.74 percent to close at 2,667.74 - the biggest decline since June 10, 2008, when the barometer plunged 7.73 percent. The index posted a combined loss of 21.8 percent for August, the steepest since October when it stumbled 25 percent.

The Shenzhen Component Index, which tracks the country's smaller stock bourse, dived 7.55 percent to 10,585.08, the largest drop since June 10 when it lost 8.25 percent.

Stocks have been on a losing streak since the Shanghai index hit a 15-month high of 3,471 on August 4 as concerns grew about a nosedive in lending and a surplus of new equities. New loans in China may fall to less than 300 billion yuan (US$43.9 billion) last month, compared with 355.9 billion yuan in July, the Economic Observer reported yesterday, citing banking sources. Caijing magazine earlier put its estimate at 200 billion yuan.

The slowdown in new lending, which slumped from a record 1.5 trillion yuan in June, is fanning worries about a further drop in share prices after the government vowed to tighten oversight. About one-fifth of the 7.72 trillion yuan in first-half new credit was reportedly channeled into the equity market.

A decline in loans won't have significant influence on the real economy as much of the first half's new credit is still sitting in the banks and will be put into long-term investment in the coming months, analysts said.

But the "psychological impact on stock investors is quite big," said Liu Yu, an Orient Securities Co trader. "The government's pledge to boost supervision of money illegally flowing into the equity market signaled it is worried about overheating."

In addition, China may soon take steps to help stabilize the domestic stock market, the Economic Weekly magazine reported yesterday. Measures could include reducing short-term bills issued by the central bank and speeding approval of new funds.

Among the positive news, Chinese mainland-listed firms posted a 14.8 percent year-on-year drop in net income in the first half, slowing from the 26 percent fall in the first quarter, exchange data showed yesterday.

Despite the plunge, some analysts still believe the market holds good investment values. Chinese stocks remain "a bright spot" among global equities because of the country's strong growth potential, Goldman Sachs said in a research note yesterday.

China is set to unveil its Purchasing Managers Index today, which is likely to show improved manufacturing activities and could help the key stock indexes rebound, some analysts said.


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