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August 18, 2009

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Home » Business » Finance

Stocks fall as funds sap capital

CHINESE shares posted their steepest single-day drop in nine months yesterday on reports that fund managers increased the withdrawal of capital from the stock market last month, further fanning worries about liquidity.

Analysts said they believed the sharp reduction was also fueled by China's recent tough stance against credit growth after a large portion of bank loans was said to be diverted into the equity market in the first half.

The benchmark Shanghai Composite Index tumbled 5.79 percent to close at 2,870.63 points. The drop was the biggest daily percentage loss since November 18, when the barometer retreated 6.31 percent.

The Shenzhen Component Index, which tracks the smaller market on the Chinese mainland, plummeted 6.65 percent yesterday to 11,668.80. The loss was also the biggest since November 18, when the index fell 7.22 percent.

Cash flows out

The net outflows of mutual funds from the Shenzhen Stock Exchange totaled 14.9 billion yuan (US$2.2 billion) last month while the nation's welfare fund reduced its equity holdings by 664 million yuan, the bourse said in a statement yesterday.

Both outflow figures were the largest on a monthly basis so far this year. The Shanghai Stock Exchange has yet to offer data on capital flows for July.

"The news further depressed the market, which was already crippled by expectations of slower credit growth and large stock sales," said Liu Yu, an Orient Securities Co trader. "The recent losing streak has had a negative impact on retail investors, causing some people to sell irrationally."

The Shanghai index has lost a collective 17.1 percent since August 4 when it hit 3,487.01, its high point this year. Despite yesterday's drop, the index still stood 57.7 percent higher than it did at the start of the year after declining 65 percent in 2008.

Domestic banks extended 356 billion yuan worth of new loans in July, only a quarter of the amount in June, after China's banking regulator ordered lenders to ensure loans for investment projects were actually being put to use in the real economy.

Wei Jianing, a researcher at the State Council's Research Development Center, said earlier that nearly 1.2 trillion yuan in new bank loans was channeled into the stock market in the first half.

A consensus has emerged among economists that the blistering credit growth won't continue for the rest of this year and that upcoming initial public offerings may divert capital from existing shares.

China Everbright Securities, which raised 11 billion yuan in its Shanghai IPO last week, will start trading today and may attract significant investment in pursuit of sizzling first-day gains.

Analysts were split on whether stocks will continue to fall or stage a rebound in the near term, but they acknowledged the trend will largely hinge on how soon investor confidence can recover.


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