Chinese stocks tumbled 4.03 percent on Thursday out of concern that large sales of government bonds later this year could suck funds from the market, and on fears the central bank might soon hike interest rates.
The Shanghai Composite Index, which was flat at midday, suffered its biggest percentage fall in three weeks to close at 3,914.204 points, just marginally off the day's low of 3,912.814.
Losing Shanghai stocks overwhelmed gainers by 773 to 74. Turnover in Shanghai A shares was modest at 126.4 billion yuan ($16.6 billion), little changed from Wednesday, suggesting many investors were staying away from the market. The government said on Wednesday that it planned to issue about $200 billion worth of yuan bonds to finance purchases of foreign exchange from the central bank for a new overseas investment agency.
Depending on how the bond sales are conducted, they could soak up money that would otherwise have gone into stocks. Although some analysts expect the sales to be conducted gradually to avoid destabilising markets, the official Xinhua news agency said the ceiling for outstanding government bond issues at the end of this year would be raised by $200 billion - implying all the bonds could be issued this year.
"The market is very sensitive to policy changes right now as investors react strongly to government actions meant to cool the market. This news is quite big. I expect it to continue showing its effects in the next few days," said Li Wenhui, analyst at Huatai Securities.
Many investors also expect an interest rate hike in coming weeks after data released this month showed inflation rising. The central bank often makes policy announcements after the market closes on Fridays, so nervous investors dumped stocks as the weekend approached.
Daily openings of new A-share investment accounts are continuing to fall, indicating less new money may enter the stock market. New accounts on Tuesday dropped by 26,438 to 129,713, the lowest level in more than two months.
Chemical maker Qingdao Soda plunged its daily limit of 10 percent to 8.90 yuan after saying its export tax rebates for two major products would be removed from July 1 - even though it predicted net profit for the first half of 2007 would rise between 50 and 100 percent.
Shipping giant China COSCO Holdings rose 3.94 percent to 18.73 yuan after soaring 93 percent from its IPO price in Tuesday's debut, and then climbing its 10 percent limit on Wednesday.
Shanghai Tech, resuming trade after being suspended for over a month, soared 29.15 percent to 11.12 yuan after saying a real estate subsidiary would sell off some property for 24 million yuan. Shanghai Tech posted its third straight pre-tax loss last year while cash on its balance sheet shrank to just 31 million yuan.