Chinese main stock index tumbled more than 2 percent on Friday, ending June with its biggest monthly loss since May 2005, because of fear that government policies would suck funds from the market. Parliament on Friday approved $200 billion worth of special yuan bond issues to fund China's new overseas investment agency.
It also authorised the cabinet to cut or scrap the 20 percent tax on interest earned from bank deposits. These steps and a string of others in the past several weeks have convinced investors that the policy climate for stocks will not be as benign in the second half of 2007 as it was during the spectacular bull run of the first half.
"The market is being put to the test right now as investors are very concerned about the bond news" and government policy in general, said Chen Jinren, analyst at Huatai Securities, who added that stocks would remain weak for days.
The Shanghai Composite Index closed down 2.39 percent at 3,820.703 points, after falling as much as 3.44 percent at one stage. On Thursday, it sank 4.03 percent. Losing Shanghai stocks heavily outnumbered gainers by 720 to 115.
Turnover in Shanghai A shares slipped to 103.7 billion yuan ($13.6 billion), the lowest since early April, from Thursday's 126.4 billion yuan as more investors pulled out of the market.
Taken together, the Shanghai and Shenzhen exchanges were Asia's worst-performing stock market in June, although they were still the best-performing for the first half of 2007, according to Reuters data.
The Shanghai index slipped 7 percent in June, although it closed the month up 43 percent from the end of last year. It is 12 percent off an all-time high hit in late May.
The market began to sour at the end of May as the government hiked the stock trading tax to discourage speculation. A string of events since May, including a crackdown on the illicit use of bank loans for stock investment and the scheduling of huge IPOs by top Chinese companies, which will increase share supply, has suggested authorities are keen to cool the market.
Depending on how the new bond sales are conducted, they will not necessarily pull money from the financial markets. A cut in the bank interest tax could actually prove positive, by raising tax-adjusted deposit rates and therefore reducing pressure on the central bank to make real interest rates positive by tightening monetary policy.
Shipping giant China COSCO Holdings dropped for the first time since a spectacular debut on Tuesday, slipping 2.51 percent to 18.26 yuan. Two stocks bucking the trend were telecoms company China Unicom, up 1.91 percent at 5.87 yuan, and Ss biggest meat processor Henan Shuanghui Investment & Development, resuming trade after being suspended for more than a year while a consortium led by Goldman Sachs took control of it, soared 119 percent to 57.90 yuan.
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