After creeping up for three days, the stock market dropped slightly yesterday as worries about an inevitable correction deepened.

The latest warning came from former US Federal Reserve Chairman Alan Greenspan, who is reported to have said China's equities might undergo a "dramatic contraction".

The benchmark Shanghai Composite Index fell 22.58 points, or 0.54 percent, to close at 4151.13, with 591 out of 905 companies closing lower.

Turnover on the Shanghai Stock Exchange was a heavy 251.63 billion yuan (US$32.88 billion), slightly below the historic high of 255.3 billion yuan (US$33.36 billion) on May 9. The smaller Shenzhen Composite Index also slid 0.72 percent to close at 1215.17. The foreign-currency denominated B-share index plunged for the third straight day after gaining 58 percent in the past two weeks. The index dropped 7.97 percent to close at 297.57.

Analysts said many retail investors are beginning to take heed of the government's repeated warnings about overheating.

"Many investors are selling their stocks in fear of the anticipated market drop," said Li Huiyong, an analyst at Shenyin Wanguo Securities.

China Securities Regulatory Commission (CSRC) released a notice on Wednesday telling brokerages to focus on educating investors about risks. A day earlier it issued a detailed framework to limit the activities of investors involved in irregular trading.

However, according to Jonathan Anderson, chief economist of UBS Asia: "Even a significant domestic equity market correction would have little or no impact on the rest of the mainland economy."

Meanwhile, good news came from the China-US Strategic Economic Dialogue yesterday. China has agreed to triple the quota of QFIIs from the current US$10 billion to US$30 billion, and remove a bar on new securities firms.

China will resume licensing securities companies and allow foreign securities firms to expand their operations in China to include brokerages.

"We have found a great deal of interest in gaining QFIIs status and quota among our clients though QFIIs money tends to concentrate in the top 100 or so stocks, many QFIIs have taken a defensive positions in recent days in anticipation of a correction," said Stephen Green, a senior economist at Standard Chartered.

Companies in financial sectors performed well yesterday, stimulated by the further opening of the financial market. Shanghai Pudong Development Bank rose 5.09 percent to close at 29.11 yuan (US$3.8), while CITIC Securities increased 2.26 percent to close at 60.29 yuan (US$7.88).

(China Daily May 25, 2007)