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The stock market plunged nearly 4 percent yesterday - the biggest one-day fall in a month - amid concerns about overvaluation of shares and rampant speculation.

 

The Shanghai Composite Index shed 147.21 points, or 3.64 percent, to close at 3899.18, with 618 out of 908 stocks closing lower. Turnover was heavy at 205.5 billion yuan (US$26.7 billion), second only to the historic record high of 255.3 billion yuan (US$33.2 billion) last Wednesday.

 

The smaller Shenzhen Composite Index dropped 2.64 percent to end at 1097.94. The foreign-currency denominated B-share index was down 1.93 percent to close at 310.68.

 

Stephen Green, senior economist of Standard Chartered, said the plunge was triggered by the recent easing of restrictions on QDII (qualified domestic institutional investors), which allows commercial banks to invest in overseas stocks. This had led to expectations of an outflow of liquidity from the domestic bourses.

 

"It looks likes there is some nervousness in the market, exacerbated by the QDII news, which provided a good excuse to sell," he said.

 

William Liu, head of CLSA China Research, said that the capital inflows of the past several months will slow, especially this month, as an increasing amount of non-tradable shares become tradable and new stocks are listed on the mainland market.

 

He also expressed concern about market overheating indicated by the increased dominance of short-term investment funds from retail investors.

 

"Retail investors currently account for nearly 70 percent in daily turnover, which shows that the market is peaking," he added.

 

Hu Zuliu, general manager of Goldman Sachs Group (Asia) Ltd, said the ratio of retail investors to institutional investors will reverse soon.

 

Investor sentiment was further dampened by the China Securities Regulatory Commission's renewed warning of caution to new investors.

 

The big drop of household banking deposits in April has also raised concern that the government may be forced to take more drastic measures to cool the market.

 

"The current valuation of A shares is considered to be too high and the market expects more high-profile warnings from government leaders," said Jing Ulrich, managing director and chairman of China Equities at JPMorgan.

 

(China Daily May 16, 2007)