Stocks drop as China raises reserve ratio

Stocks in Shanghai slumped Tuesday, sending the benchmark index to the lowest level in nine months, as investors sold off shares as China's central bank decided to tighten money supply in early May.

On May 1, the People's Bank of China, the central bank, ruled that from May 10, all China's big lenders will have to increase their reserve minimum to 17 percent of their savings. The order marks the 3rd attempt by China to rein in credit market liquidity since late 2008 when the global financial crisis erupted and forced governments to back up their economies with stimulus plan and very loose money policies.

The 50 basic points increase in the required reserve ratio will removed at least 300 billion yuan from the financial system, which had its impact on the stock market Tuesday.

The Shanghai stock composite index closed at 2835.28 points, dropping 35.33 or 1.23 percent from Friday. The market closed Monday for holiday. The Shenzhen stock index closed at 10960.77 points, losing 201.77 points, or 1.81 percent.

As China's economy rose by 11.9 percent in the first quarter this year, China's regulators are now more concerned with inflation and asset bubbles. Housing prices, which rose precipitously in the first two months, are what China's homebuyers irk most and have stoked concerns of a property boom-bust cycle, Chinese style.

Now that the central bank has raised the reserve minimum, investors are anticipating more tightening measures, including interest rate hikes, from the central bank to curb bubbles.
Bank and property stocks led Tuesday's slump. The China Merchant Bank, the fifth largest in the country, lost 0.37 yuan or 2.59 percent. The Vanke Co. Ltd, the largest real estate developer, dived 0.35 yuan, or 4.49 percent.

Beijing will limit new apartment purchases to one per family as part of measures aimed at slowing the rise in housing prices, Xinhua News Agency reported. Beijing also asked commercial banks to raise mortgage rates for second-home loans, and suspend third-home loans.

The Shanghai Composite index plunged 7.7 percent in April, as the government unwound monetary stimulus and stepped up measures to prevent a housing bubble inflated by record lending last year. It has slumped 12 percent in 2010, the world's second-worst performer.

People's Daily Online