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Stocks slump over Wall Street turmoil, economic worries
By Dong Zhixin (chinadaily.com.cn)
Updated: 2008-09-16 15:41

Chinese investors dumped shares on Tuesday, as worries over the economy and the spillover effect from Wall Street turmoil outweighed a surprise loose in the country's monetary policy.

Panic selling sent the benchmark Shanghai Composite Index down to the lowest level in 22 months, below the psychologically important level of 2,000 points.

Related readings:
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 Economy to continue 'doing fine'

The Chinese equity market re-opened Tuesday after the traditional Mid-Autumn festival, embracing a mixed flow of bad and good news.

The bad news came across the globe from the turbulent Wall Street, where Lehman Brothers filed for bankruptcy on Monday and Merrill Lynch would be sold to Bank of America. In response, US stocks tumbled, with the Dow Jones Industrial Average tumbling more than 500 points on Monday, triggering a wave of sell-off in the global market.

Chinese investors fear the worst is yet to come in the American financial system, thus dragging the world's largest economy into the deep recession. The US is the second largest destination for Chinese exports and its economic health, especially the financial strength of the consumers is crucial to China's exporters.

The good news came in the home turf from the central bank, which announced on Monday a cut in lending rates and reserve requirement for small banks in a sharp reversal of the monetary policy.

The benchmark one-year lending rate was lowered 0.27 percentage point to 7.20 percent, while the small banks can now set aside 16.5 percent of their deposits as reserves, down from the original 17.5 percent.

Analysts said the long-awaited move is expected to cut down on firms' borrowing costs, thus help improve their profit margin.

It may also be a boost to the faltering real estate sector, as lower mortgage costs may lure wait-and-see buyers back into the market. Shares of property developers rallied, with Poly Real Estate Group jumping 6.57 percent to 12.00 yuan per share.

However, bank shares, which enjoy a heavy weighting in the benchmark Shanghai Composite Index, dived, as their profitability may decline after the rate cut. The central bank left the savings rate unchanged, thus lowering the interest spread for the banks, most of whose profits came from interest income.

Most banks dived 10 percent, the maximum allowed by the exchange, or close to that daily down limit.

The unusual central bank move also ignite investor worries that the country's economic situation may be worse than expected.

These concerns led to heavy selling pressure, forcing the Shanghai Composite Index to as low as 1,974.39 points, the lowest level in 22 months.

The gauge then managed to recovered part of the loss in the last 30 minutes of trading to end the day at 1,986.64 points, a loss of 4.47 percent, or 90.03 points from the previous close.

That close marked a loss of 62.25 percent since the start of the year, making its one of the worst performers in the world.

The Shenzhen market fared much better on Tuesday, as very few banks are listed in the bourse. The Shenzhen Composite Index fell 1.39 percent to 570.74 points.

Other Asian stock markets also suffered big falls. In Japan, the Nikkei 225 index tumbled 4.95 percent, while the Hang Seng index in Hong Kong plunged 5.44 percent.