Liquidity concerns lower stocks
Updated: 2011-08-31 09:24
SHANGHAI - Stocks on the Chinese mainland fell for a third day on concern that tighter credit will make it harder for smaller companies to borrow money for expansion, thereby curbing their earnings prospects and threatening to further slow the economy.
An index of startup companies slid for the first time in six days after money-market rates jumped the most in a week.
"Liquidity will remain tight in the months ahead as inflation is still a big problem and may remain high in August," said Wu Kan, a fund manager at Dazhong Insurance Co, which oversees $285 million. "It's hard for the government to loosen monetary policy and valuations will continue to face pressure."
The benchmark Shanghai Composite Index fell 9.82 points, or 0.4 percent, to 2566.60, erasing a 1.5 percent gain. It dropped 1.4 percent on Monday, the most in a week, after the central bank ordered lenders to set aside more reserves against margin deposits. The CSI 300 Index lost 0.4 percent to 2841.74.
The ChiNext index of 100 companies retreated 2.1 percent while the Shenzhen small and medium enterprise index lost 0.9 percent.
The benchmark seven-day repurchase rate, gained 55 basis points to 4.96 percent as of 3:02 pm in Shanghai, according to a weighted average rate compiled by the National Interbank Funding Center. The rate jumped after Standard Chartered Plc and Bank of America Merrill Lynch said the central bank issued a notice on Friday that included margin deposits in the requirements.
"The new policy will have a big impact on China's liquidity situation in September," said Shi Lei, head of fixed-income research at Ping An Securities Co, a unit of China's second-biggest insurance company. "The cash shortage will probably worsen in the second half of next month, when banks are desperate for cash to meet month-end capital requirements."
The Shanghai Composite Index has lost 5 percent this month after the United States was stripped of its AAA credit rating and on concern that the debt crisis in Europe will spread. The gauge remains down 8.6 percent this year as the central bank raised interest rates five times and ordered lenders to set aside more cash as deposit reserves 12 times since the start of 2010 to contain inflation.
Shanghai's A-share index may slump as much as 25 percent by the end of the year in a "worst-case" scenario as the order to widen the base of required reserves threatens non-bank lending, according to BNP Paribas SA.
Tightening measures have driven the lending rate in the "shadow banking system" from the 13-to-17 percent annual range between 2003 and 2010 to around 24 percent in the first half of this year, BNP Paribas analysts Dorris Chen and Kathryn Ding wrote in a report, citing the rate in the central bank-monitored alternative lending market.
Bank of Ningbo Co Ltd, partly owned by Singapore's Oversea-Chinese Banking Corp, lost 1.7 percent to 10.03 yuan ($1.57).