Amid concerns about short-term market prospects and in reaction to continual sharp falls on neighboring stock markets including Hong Kong and India the value of Chinese shares closed 5.33 percent down on Wednesday…the biggest drop in four years. 

The Composite Stock Index on the Shanghai Stock Exchange, which comprises yuan-denominated A and foreign-currency B shares, closed at 1,589.55 points which was down 89.58 points.

The drop is the biggest in any one day since January 28, 2002 when it tumbled by 91.93 points -- 6.33 percent. The major index of Shenzhen Stock Exchange, the Shenzhen Component Index, was down 199.16 points to close at 4,095.32 points.

Prices of 1,184 shares, out of the country's 1,370 domestically listed firms, were down. The prices of 56 shares were up and one remained unchanged. Trading was suspended on the remaining shares for an ongoing State share reform or shareholders' session.

Analysts with Beijing Shoufang Securities Co. said the tumble was mainly caused by businesses taking profits out after significant rises during the past year with China's major stock index up by 70 percent.

The Composite Stock Index on the Shanghai Stock Exchange, the country's major index, nudged 1,700 points earlier this week after it had hit a six-year low of 998 points on June 6, 2005.

The resumption of initial public offering (IPO) last month after a one-year suspension was also considered a negative factor in the short term as IPOs would result in a massive outflow of cash from the stock market to those firms listed on the exchange without sufficient capital inflow, dealers explained.

Analysts said several firms including the Bank of China, the country's second largest commercial bank, had announced their plans to go public domestically. The bank will issue no more than 10 billion shares on the Shanghai exchange later this month having made its IPO debut on the Hong Kong Stock Exchange on June 1.

The analysts added that China's recent moves to curb rapid rises in house prices through a package of real estate policies and major downward fluctuation of commodity prices on the international markets were also being blamed for the price drop in real estate and commodity firms on the Chinese stock market.  

The share price of some firms specializing in titanium, gold, copper and other non-ferrous metal production were down by about 30 percent after their prices had tripled in the past year. In the main this was driven by rapid price increases of commodity futures on international markets.

The analysts said the regulator, the China Securities Regulatory Commission, was believed to expect that the stock markets would stabilize by resuming IPOs and approving a growing number of these applications. Some institutional investors adopted a defensive strategy in response by dumping those shares for big profits.

The regulator didn't wish to see financial bubbles just getting bigger and bigger with some share prices have doubled or even tripled with the support of fundamentals, explained the analysts. They said IPOs would help cool market speculation.  

The Chinese stock markets rose to their highest levels in more than 18 months earlier this week with the Shanghai Composite Stock Index at 1,678 points on Tuesday. The index was 998 points on June 6, 2005 and it has jumped by about 60 percent since then.

Xu Hui, a securities analyst, said the powerful fluctuations on the international capital market also had a cooling effect on the Chinese economy. He said the Hang Seng Index on the Hong Kong stock exchange was down by 1,500 points in two weeks while the Indian stock market recorded a daily fall of up to 15 percent recently.

Chinese markets are unlikely to be immune from international movements as China is increasingly doing business with other countries. Many analysts have expressed concerns about market prospects.

Analysts with Shenyin & Wanguo Securities Co. said Wednesday's tumble indicates the beginning of a medium-term period of downward trends while others say the short-term readjustment means opportunities for investment in this bull market type cycle.

Long Yun, an analyst with Hexun Information Co, said stock prices were likely to stabilize after significant falls. The coming IPOs would bring quality firms with attractive values to the Chinese markets step by step and add new blood to expand the scale and improve the value of the markets, he said.

(Xinhua News Agency June 8, 2006)