China's Stock Market Sinks to Fresh 16-Month Low

China's main stock index sank more than 3 percent to a fresh 16-month closing low on Tuesday, led by financial and property shares, on worries about rising interest rates and heavy supplies of shares from IPOs.

The Shanghai Composite Index ended down 3.09 percent at 2,651.605 points, near an intra-day low of 2,644.776. That left it down 57 percent from last October's record peak.

Fresh rumours that the central bank might soon hike interest rates to fight inflation hit the market, and concern about the supply/demand balance for shares was fuelled by the securities regulator's decision late on Monday to approve two major initial public offers of equity.

Technically, the index broke a support area at 2,723-2,732 points, its late February 2007 and March 2007 lows, which it had tested and held repeatedly on a closing basis last month. The break could point down in coming days or weeks to the February 2007 low of 2,541 points, analysts believe.

"Investors are helpless and have no confidence about making money in a market where nobody can identify a floor," said Zhou Lin, analyst at Huatai Securities.

Turnover in Shanghai A shares was tiny at 42.9 billion yuan ($6.3 billion) against 40.4 billion yuan on Monday, which was its lowest level since December 2006. Losing Shanghai stocks outnumbered gainers by 758 to 147.

Valuations for many Chinese blue chips have fallen to levels where they are no longer prohibitively expensive compared to foreign stocks, many fund managers say.

But as the market panics, every rebound is met by fresh selling pressure.

Late on Monday, the securities regulator approved an application for a 10 billion yuan IPO by Everbright Securities, and an 8.97 billion yuan IPO application by China South Locomotive & Rolling Stock. With the market so weak, the offers appear unlikely to take place any time soon.

A big IPO by China State Construction Engineering Corp has already been delayed for several weeks. But investors now know that any market recovery could merely be the signal for three large IPOs to proceed, straining liquidity.

"Investors had already been widely expecting an interest rate hike, and this IPO news was another blow to their spirits. No one dares to buy," said analyst Wu Nan at Xiangcai Securities.

The official Shanghai Securities News on Tuesday quoted a poll of 135 institutional investors by Guotai Junan Securities as finding over half expected the market to fall further.

Eighty percent thought the index would trade between 2,500 and 3,500 points in the second half of 2008.

Merchants Bank Sinks

Merchants Bank was the hardest hit bank on Tuesday, plunging its 10 percent daily limit to 21.08 yuan. Most other banks fell about 3 percent.

CITIC Securities, the biggest listed brokerage, sank 7.32 percent to 22.17 yuan after saying the China Life group had cut its stake in it to 4.97 percent from 5.32 percent.

Major real estate developer Vanke slid 6.10 percent to 8.46 yuan. Oil refiner Sinopec dropped 4.04 percent to 9.74 yuan, extending a 10.18 percent slide over the previous two days, as high global crude oil prices threatened its refining margins.

Qingdao Soda Ash Industrial lost 5.16 percent to 6.25 yuan after saying an accident at one of its plants had killed four people and would force a four-day suspension of production, although it added that overall output would not be affected. The stock had been suspended since June 27.

Shanghai Jielong Group Industry, which owns land near the expected location of Shanghai's planned Disneyland, gained 2.64 percent to 8.93 yuan.

It jumped 10 percent on Monday after a Hong Kong newspaper reported Chinese authorities had finally reached a deal with Walt Disney on the project.

But Disney and Shanghai city officials denied the newspaper report, and other Shanghai-related shares which had surged on Monday in response to the Disney theme, such as taxi operator Haibo, fell back on Tuesday.

Among gainers, Shanghai Worldbest Pharmaceutical surged 9.69 percent to 5.44 yuan, but came well off an intra-day high of 7.85 yuan after the exchange suspended it for half an hour because of "abnormal trading".

It had been suspended since April 2007 for reforms to its state shareholding structure.