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WRAPUP 2-China markets fall, rate rise talk spooks investors

By Fayen Wong SHANGHAI, Nov 12 (Reuters) - China stocks fell more than 5 percent on Friday for their biggest percentage loss in over a year, while global commodities tumbled on speculation the central bank will raise interest rates on Friday to tackle inflation. The sudden drop in China markets in turn spooked dealers elsewhere, adding to a drag on stocks in Asia and Europe and underlining the skittishness of investor nerves amid a number of global uncertainties, including G20's struggle to deal with currency tensions and a revival of euro-area debt worries. China's central bank has ramped up its efforts to tighten monetary conditions in the past month, increasing bank reserve requirements to a record level for big banks and surprising markets on Oct. 19 by announcing the first rate rise in nearly three years. China's economy is growing strongly but expectations of rate rises often spark investor concerns that demand for the major engine of global growth will slowdown. Rumours that the central bank would raise rates again later on Friday after data this week showed inflation at its highest level in over two years sent the Shanghai Composite Index down to a two-week closing low of 2,985.4. Shanghai copper futures dropped by their daily limit of 5 percent. "There are rumours that there will be a rise in interest rates tonight, with the rise being as much as 50 basis points," said Zhang Gang, an analyst at Central Securities in Shanghai. "I cannot say if this will actually be the case, we will all be watching for an announcement tonight." Both markets were ripe for profit taking given the right cue, analysts said. The Shanghai index reached a nine-month high on Thursday after jumping 20 percent since the end of September. Shanghai copper futures on Thursday hit their highest level since March 2008 and were up 41 percent from a 2010 low hit in June. China's benchmark debt yields also rose on Friday as the rates speculation swirled. The government's five-year bond yield jumped 30 basis points to 3.75 percent, the highest level since September 2008. That took the combined rise in the yield to 96 basis points since last Friday, although some were sceptical that the central bank would raise rates so soon after its October announcement. "I personally think it's unlikely, given the government is under pressure to control hot money inflows and interest rates have just been raised not long ago," said Guo Yong, an analyst at Jinrui Futures in Shenzhen. Fears China's demand growth would be undermined by a rate rise weighed on other markets. Zinc fell 4 percent in London and grains and precious metals fell back after recent heady gains. LOST APPEAL Data on Thursday showed that China's inflation rate rose to 4.4 percent in October and that bank lending blew past expectations. The figures highlighted the challenges Beijing faces and fuelled market worries that policymakers will have to be more aggressive to bring prices and liquidity under control. In October China raised its one-year deposit rates and one-year lending rates by 25 basis points, to 2.5 percent and 5.56 percent, respectively. While China has in the past raised rates in 27 basis-point increments, a legacy of past accounting practices, market observers said China's central bank had never raised rates in one go by 50 basis points. Zhu Jianfang, chief economist at CITIC Securities in Beijing, said such a big increase was unlikely. Chinese stocks had lost their near-term "risk and reward appeal", as Beijing looks set to roll out more tightening measures, Goldman Sachs said in a client note. A strengthening dollar weighed on oil prices, which in turn prompted investors to sell off energy and mining stocks. Sinopec Corp was the biggest drag on the index, ending down 3.3 percent.

The oil major's stock price fluctuated sharply throughout the day. Another oil major, PetroChina was also volatile and ended down 1.6 percent after its biggest intraday percentage swing since September 2008. Increasing worries about Ireland debt also soured sentiment, pushing Asia and European stocks lower. Shanghai steel rebar futures, which hit a 15-month high earlier this week, dropped more than 4 percent, close to their to downside daily limit. ($1=6.629 Yuan) (Reporting by Beijing and Shanghai markets team, additional reporting by Farah Master in SHANGHAI, Rujun Shen and Luke Pachymuthu in SINGAPORE) (Editing by Jacqueline Wong) ((fayen.wong@thomsonreuters.com; Reuters Messaging: fayen.wong@thomsonreuters.net; +86 216 104 1779)) Keywords: CHINA MARKETS/RATE . Keywords: CHINA MARKETS/RATE (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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