China's stock market is turning bearish, once again, as individual investors are shying away to hoard cash in banks and as mutual funds are beginning to dump previously favoured shares.

The market, however, is expected to return to positive territory in the year's second half, after concerns are addressed about China's monetary policy, analysts said.

The benchmark Shanghai composite index, which groups yuan-denominated A shares and hard-currency B shares, fell last Thursday to 1427.75 points. That was down almost 20 per cent from 1,783 points, the early peak, on April 7.

"Individual investors are clearly retreating from the market, as they have lost considerably during the recent market slump," Yang Jie, head of Hong Kong-based Masterlink Securities Co's China research division.

The daily trading volume in China's two bourses -- the Shanghai Stock Exchange and the Shenzhen Stock Exchange -- slipped to around 6 billion yuan (US$725 million) last week, about half of this year's average to date.

Even though the one-year bank deposit rate has been set at 1.98 per cent, lower than the recently reported inflationary rate of nearly 3 per cent, residents' deposits at banks continue to increase.

Overdue deposits rose 17.8 per cent in April from a year ago, indicates the People's Bank of China (PBOC), the nation's central bank.

"Investors will stick to their wait-and-see strategy until the central bank makes it clear whether or not it will raise interest rates in the year's second half," Yang said.

"The central bank's monetary policy is probably the single biggest concern market investors have right now."

Senior PBOC officials recently hinted higher interest rates will be adopted to combat inflation if other credit-tightening measures fail to bring the soaring domestic price level down to earth.

The National Bureau of Statistics (NBS) has reported the consumer price index (CPI), policy-makers' key inflation gauge, hit a seven-year high of 4.4 per cent in May.

"Expectations of a rate hike have caused the market to fall sharply over the past two months. The market will have little room to slip down once the monetary uncertainty is removed," Yang said.

PBOC will most likely maintain the current rates for deposits and lending, or increase the rates marginally as the government's soft-landing efforts begin to pay off, he said.

Growth in fixed-asset investments slowed to a one-and-half year low of 18.3 per cent in May, from 34.7 per cent in April, indicate NBS figures.

China's industrial output hit 431 billion yuan (US$52 billion) last month, up 17.5 per cent from the same month last year.

That compares with a 19.1-per-cent increase in April, NBS said.

The economy grew 9.8 per cent in the first quarter, and 9.1 per cent last year.

The central bank's credit-tightening measures will gradually take effect, and the economic growth will slow down to about 9 per cent in October, predicted Zhuang Jian, an economist with the Asian Development Bank's Beijing Office.

"China's central bank clearly understands the potential damages interest rate hikes might cause to many of the country's industrial sectors," Zhuang said.

"The economy is overheated, but only in a few sectors, including steel, auto and real estate."

A steep rise in the interest rate will result in funding constraints in other sectors, which will likely result in greater investor enthusiasm, Zhuang added.

Returns generated by the overheating industries normally exceed 50 per cent, experts said.

Mutual funds, the main institutional investors in China's stock markets, have started to sell off previously favoured shares, said Liu Jingde, a securities analyst with Beijing Securities Co's research centre.

On average, open-end funds held 53.04 per cent of their investments in stocks last week, down 1.31 percentage points from a week earlier, indicates a report by CITIC Securities Co.

Close-end funds had 67.86 per cent of their investments in stocks, down 0.24 percentage point from a week earlier, the report said.

Shares of Chinese auto makers fell sharply last week as funds opted for aviation, rubber and/or paper stocks, the report said.

Funds that have invested heavily in technology firms showed positive signs last week, and were wooed by investors, the report said.

Mutual funds also sensed the chill last week during their initial public offerings (IPOs), as the market headed south.

The No 4 fund, launched last week by Boshi Fund Management Co, sold 6.1 billion yuan (US$737 million) worth of units. That was less than the company's early expectations of 10 billion yuan (US$1.208 billion).

Investors are also worried funds could be drained out of China's market once the qualified domestic institutional investor (QDII) programme proceeds, experts said.

"Overseas shares, with their comparatively low price-to-earnings ratios, will become more attractive to institutional investors," Liu said.

(China Daily June 30, 2004)