SHANGHAI - Stocks on the Chinese mainland fell for the first time in three days on speculation bank loans to local government borrowers will hurt profit and the European debt crisis may worsen after Moody's Investors Service downgraded Portugal's debt.

SAIC Motor Corp dropped from a three-month high. Wuliangye Yibin Co rose 1.2 percent after China International Capital Corp recommended liquor makers for the second half.

"Gains in share prices are a bit fast these days, and the market needs a breather here," said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co, which oversees $285 million. "There's still lots of uncertainty about banks' loans to local government financing vehicles and that will jeopardize their profitability."

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The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, lost 5.88 points to 2810.48 at its close. The CSI 300 Index declined 0.3 percent to 3113.71.

The Shanghai gauge has erased this year's losses of as much as 6.7 percent after rallying over the past two weeks on Premier Wen Jiabao's comments that inflation is under control. The index has added 0.1 percent in 2011 and trades at 12.9 times estimated earnings, compared with 11.2 for an MSCI measure of emerging-market shares, according to data compiled by Bloomberg.

A gauge of financial stocks dropped 0.8 percent on Wednesday, the most among the CSI 300's industry groups. Industrial and Commercial Bank of China Ltd slid 0.9 percent to 4.37 yuan (68 cents).

China may have about 6.67 trillion yuan of bank lending this year, below a target of 7 trillion yuan to 7.5 trillion yuan, the China Securities Journal reported on Wednesday, citing an unidentified securities company official.

Banks extended about 4 trillion yuan of new loans in the first half of the year, with June new yuan loans at about 500 billion yuan to 600 billion yuan, according to newspaper.

SAIC Motor lost 1.2 percent to 19.14 yuan, narrowing this year's gain to 30 percent. The shares have rallied on speculation China's auto sales will grow in the second half. China First Heavy Industries Co, a maker of equipment used in the mining and energy industries, fell 1 percent to 4.83 yuan. China Erzhong Group Deyang Heavy Industries Co, an equipment supplier to power producers, slid 1 percent to 10.80 yuan.

Chinese stocks' volatility jumped by the most in seven months in June amid concerns about inflation in the country and increased regulatory scrutiny following accounting problems of Chinese companies listed in North America.

China faces an "inevitable crisis" if the government loosens monetary policy in the second half of the year, according to Andy Xie, an independent economist.

"The market consensus is that China will loosen in the second half," Xie, formerly Morgan Stanley's chief Asia economist in Hong Kong, said on Bloomberg Television on Wednesday. Such a move could boost inflation and investors should "duck for cover" if that happens, he said.

A measure of consumer staples stocks gained 1.1 percent, the most among CSI 300 industry groups. Wuliangye, China's maker of white liquor, rose 1.2 percent to 36.51 yuan. Luzhou Laojiao Co, a spirits producer in the southwest province of Sichuan, gained 2.3 percent to 46.95 yuan.

White-liquor retail prices including Wuliangye rose to record highs in May, reflecting strong demand, CICC analysts led by Yuan Feiyang wrote in a report dated on Tuesday.

Mark Mobius, who oversees about $50 billion as the executive chairman of Templeton Emerging Markets Group, said China's economy won't slow as much as some predict. "At the end of the day, the so-called slowdown in China is not going to be as slow as people realize," Mobius told reporters in Budapest.

Bloomberg News