The mainland stock market fell 4 percent to a seven-month low yesterday, despite the regulator's recent approval of new mutual funds seen as government support to the market.
The benchmark Shanghai Composite Index plunged 177.76 points to close at 4192.53, with 749 out of 910 stocks closing lower. The Shenzhen Component Index slid 4.28 percent, or 692.85 points, to close at 15486.67. The turnover on two bourses amounted to 135.59 billion yuan ($19 billion), down 16.4 percent from last Friday.
Analysts said investor sentiment is low as market liquidity is expected to be strained because of new-share issues and conversion of non-tradable shares into tradable shares.
In addition, Yi Gang, vice-governor of the People's Bank of China, said on Sunday that the central bank will continue to stick to a tightening monetary policy to curb inflation, which defied investors' expectation of a loosening policy.
"The good news of new mutual funds cannot offset the negative impact of large-scale new share issues," said Chen Jiuhong, an analyst at Haitong securities.
China Unicom plunged to the daily limit to close at 10.92 yuan ($1.52) yesterday, after it was reported that it plans to raise 60 billion yuan ($8.4 billion) through new shares.
But Tong Jilu, director of China Unicom, is said to have denied the report.
Large caps fell sharply in yesterday's trading. China's largest real estate developer Vanke A tumbled 4.92 percent to close at 22.81 yuan ($3.2). PetroChina sunk 5.27 percent to close at 21.91 yuan ($3.06).
"The stock market is expected to rebound soon as many stocks have dropped to a level that will attract value investors," said Wu Feng, an analyst at TX Investment. He added that the fall has squeezed some bubble and a rebound is expected after the annual sessions of the National People's Congress and the Chinese People's Political Consultative Conference next month.
"Investors can suck in some high-performing stocks as many have fallen to a level that is lower than their potential profit growth," said Yan Ji, investment director of HSBC Jintrust Fund Management Co Ltd.
Analysts said they expect the government to take a series of measures to support the market, including stricter supervision of new share issues and approval for new mutual funds.
It is also reported that the government may consider lowering the stamp tax on stock trading to lift the market sentiment.
Source: China Daily