SHANGHAI: China's main stock index hit a 2012 low on Tuesday, partially led by banking stocks, as investor sentiment was dealt another blow by sharp falls in global markets overnight, concerns over a slowing Chinese economy and monetary authorities' reluctance to expand money supply rapidly to recharge growth.
The Shanghai Composite Index fell 0.2 percent to 2,136.4 points at midday after it hit a 2012 intraday low of 2,131.0 in early trade, toppling the previous low of 2,132.6 set on Jan. 6.
The CSI300, which tracks China's largest listed firms, was down 0.14 percent and opened at its lowest point since Jan. 17.
Banking stocks fell amid a rising number of forecasts that the state-dominated sector's growth will slow down sharply this year in line with the economy.
China's fifth largest lender, Bank of Communications , dropped 1.2 percent while top rival Industrial and Commercial Bank of China fell 0.8 percent.
China's economic growth slowed to a three-year low of 7.6 percent in the second quarter. Investors both at home and abroad are now watching closely where the world's second-largest economy is heading for in the third quarter.
A China purchasing managers' index (PMI) released on Tuesday rose in July to its highest level since February, boosted by a pick up in the pace of manufacturing output, preliminary results of a survey showed on Tuesday.
The HSBC Flash PMI rose to 49.5 in July from 48.2 in June, rising close to the 50 level that divides expansion from contraction. The increase was driven by a jump in the output sub-index to 51.2 - the best showing since October 2011.
Still, the HSBC PMI has been below 50 for nine straight months, showing a need for easing policies to remain in place.
"This calls for more easing efforts to support growth and jobs," Qu Hongbin, chief China economist with index sponsor HSBC, said in a statement accompanying the survey.
"We believe the fast falling inflation allows Beijing to do so and a more meaningful improvement of growth is expected in the coming months when these measures fully filter through."
POLICY CONCERNS
Traders have warned that official reluctance to expand the money supply too rapidly could condemn China's stock market to a third straight year of losses in 2012..
A congested initial public offering (IPO) pipeline is likely to aggravate tight liquidity conditions as Beijing, wary of reigniting inflation, sticks to its "prudent" monetary policy.
Instead of cutting banks' reserve requirement ratios (RRR) to inject long-term money into the financial system over the weekend, as widely expected by the market, the PBOC conducted 95 billion yuan ($15 billion) in reverse repo business in its regular open market opetations on Tuesday.
Traders said using reverse repos to iron out a liquidity shortfall in the market might indicate that the central bank was still reluctant to cut RRR in the near term.
"Short-term money derived from the PBOC's reverse repo business won't be able to support the real economy or the stock market," said a trader at a Chinese private equity firm.
"The government's reluctance to expand monetary base has become one of the main factors that point to a likely continued downtrend of the Shanghai Composite Index in the near term."
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