China stocks drop to two months low

Associated Press

Tuesday, September 11, 2007 (Shanghai):

Chinese stocks registered their biggest drop in two months Tuesday, with the key Shanghai Composite Index tumbling 4.5 per cent following reports that inflation surged in August to an 11-year high.

The Shanghai index, which measures both local currency and foreign-denominated shares, closed at 5,113.97, down 241.32 points. It was the biggest one-day percentage fall since a 5.3 per cent decline July 5.

Analysts said investors were spooked by inflation data showing that China's consumer price index rose 6.5 per cent in August, its largest increase in 11 years.

"Today's release of the high consumer price index definitely caused some investors to panic, especially individual investors," said Peng Yunliang, a senior analyst at Shanghai Securities.

Prices have surged partly due to a 49 per cent jump in the price of pork and other meat from the same month a year ago, according to government data released Tuesday.

The data confirmed expectations that trends are defying regulators' efforts to bring double-digit economic growth down to more sustainable levels.

Chasing higher returns

Baoshan Iron & Steel fell 5.2 per cent to 18.00 Yuan. Property developer China Vanke slipped 5 per cent to 30.78 Yuan. China Minsheng Banking was off 6.9 per cent.

Before Tuesday's fall, Shanghai's benchmark had about doubled in value since the year's start. After the market's close, it remained 91 per cent above where it started the year.

China's Yuan-denominated shares are generally not open to foreign investment. Most of the upward push has been from individual Chinese seeking higher returns in the market than they can get on bank deposits.

In recent weeks, state media have repeatedly run reports showing government officials holding seminars meant to educate such investors about the risks of a market correction.

The economy grew 11.9 percent in the latest quarter, despite repeated interest rate hikes and other moves aimed at tightening credit.