China’s Stocks Have Biggest Tumble in 10 Years; Vanke Plunges
By Zhang Shidong and Yidi Zhao

Feb. 27 (Bloomberg) — China’s stocks tumbled the most in 10 years on concern that a government crackdown on investments with borrowed money will end a rally that drove benchmarks to records.

China Vanke Co., the nation’s biggest property developer, and China United Telecommunications Corp. were among stocks that fell by the daily limit. China’s stock market capitalization, $1.16 trillion as of yesterday, is about 2 percent of the global total, according to data compiled by Bloomberg.

“This is the first day when the bears on the index have won,” said Liu Yang, who oversees the $421 million China Fund for Atlantis Investment Management (H.K.) Ltd. “It’s very simple to me. After very good returns, the market just wants to take a rest by using any excuse to sell.”

The Shanghai and Shenzhen 300 Index slid 250.18, or 9.2 percent, to 2457.49. The measure, which jumped 13 percent in the past six sessions, closed at a record yesterday.

Today’s rout wiped out $107.8 billion from a stock market that doubled in the past year as 249 of the key index’s 300 shares plunged by the 10 percent limit. The 300 index is valued at 38 times earnings, compared with 16 times for the Morgan Stanley Capital International Emerging Markets Index.

The State Council, China’s highest ruling body, has approved a special task force to clamp down on illegal share offerings and other banned activities in the market, the government said. The group will provide advice on regulations and policy explanations of the securities market, according to a statement published Feb. 25 on the central government’s Web site.

Tightening Measures

Banks in China are banned from lending money for stock investments. The regulator last month ordered banks to examine personal loans to prevent them being used to buy shares. The central bank carried out similar crackdowns on unauthorized margin trading in 1997 and 2001 after indexes surged.

The government must pay attention to “bubbles” in its stock market before they get out of hand, Cheng Siwei, vice chairman of the Nation’s People Congress, wrote in a commentary published Feb. 6 in the Chinese-language Financial News. The Congress next convenes for an annual meeting on March 5.

“People are worried that more tightening measures may come out,” said Mona Chung, who helps manage about $950 million at Daiwa Asset Management Ltd. in Hong Kong.

The China Securities Regulatory Commission is looking into the reasons for the market’s slump, Beijing-based spokesman Liu Fuhua said. He declined to comment on speculation that Chairman Shang Fulin may leave the commission.

China imposes restrictions on the amount of stocks international investors can buy. UBS AG’s $800 million quota is the largest among 52 overseas institutions approved to invest in mainland stocks and bonds.

China Vanke Tumbles

Stocks surged last year after a government plan to make more than $200 billion of state-owned stock tradable revived investor demand and paved the way for sales by some of the nation’s biggest companies. The economy, which in 2005 overtook the U.K. as the world’s fourth biggest, averaged annual growth of 9.6 percent in the past five years.

Shares of China Vanke lost 1.58 yuan to 14.26. United Telecommunications, which controls the nation’s second-largest mobile-phone operator, declined 0.54 yuan to 4.89. Baoshan Iron & Steel Co., China’s biggest steelmaker, slid 1 yuan, or 10 percent, to 9.03.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, plunged 8.8 percent to 2771.79. Today’s tumble was the steepest since Feb. 18, 1997, when the index plunged on concern about Deng Xiaoping’s health. China’s paramount leader died the following day. The Shenzhen Composite Index, which covers the smaller one, dropped 8.5 percent to 709.81. The measure has surged 29 percent this year.

`Psychologically Fragile’

“The rally pushed the whole market to a level where valuations were exceptionally high and that made investors psychologically fragile,” said Li Xuewen, who manages about $284 million at Invesco Great Wall Fund Management Co. in Shenzhen. “There is no reason for you to be a bull on China stocks any more.”

China Minsheng Banking Corp. led declines by lenders as the central bank raised the reserve ratio this week for the fifth time in eight months, reducing funds available to commercial banks for lending.

The central bank ordered lenders to set aside 10 percent of deposits from Feb. 25, up from 9.5 percent. The increase is meant to help slow down inflation and investment in the world’s fastest-growing major economy.

“The reserve ratio hike has cut the amount of money banks can use for lending,” said Yan Ji, an investment manager at HSBC Jintrust Fund Management Co. in Shanghai. “That will hurt lenders’ earnings.”

Hainan Airlines Drops

Minsheng Banking, the nation’s fastest growing bank, fell 1.26 yuan, or 10 percent, to 11.37. China Merchants Bank Co., China’s No. 6 lender, lost 1.51 yuan, or 9 percent, to 15.34.

Shanghai Pudong Development Bank Co., the Chinese partner of Citigroup Inc., declined 2.41 yuan, or 10 percent, to 21.85. Industrial & Commercial Bank of China Ltd., the nation’s biggest listed lender, retreated 0.41 yuan, or 8 percent, to 4.69.

U.S. dollar-denominated B shares of Hainan Airlines Co., China’s fourth-largest carrier that is partly held by U.S. financier George Soros, plunged 6.7 U.S. cents, or 10 percent, to 60.1 U.S. cents.

Shanghai Zi Jiang Enterprise Group Co., a packaging materials maker, slid 0.44 yuan, or 10 percent, to 3.92.

Shanghai Haixin Group Co., a producer of plush fabrics, declined 0.73 yuan, or 10 percent, to 6.55. Founder Technology Group Corp., China’s second-largest computer maker, slid 0.64 yuan, or 10 percent, to 5.72.

Elsewhere, Liuzhou Iron and Steel Co. surged 64 percent from its offer price to 16.46 yuan on its first day of trading in Shanghai.

To contact the reporter on this story: Zhang Shidong in Shanghai at at ; Yidi Zhao in Beijing at at

Last Updated: February 27, 2007 06:49 EST

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