Shanghai's hard currency B-share index fell 3.78 percent to 121.139 points, the lowest close since March 8, 2001. Shenzhen's shed 1.48 percent to 190.22, the lowest close since January 28 this year.

B shares are open to foreign and Chinese investors.

Zhou Xiaochuan, chairman of the China Securities Regulatory Commission (CSRC), said in Hong Kong on Tuesday the government had allowed more large caps to go public in order to curb speculation in small caps.

"The CSRC has helped enhance the stability of China's stock market by allowing large-capitalized companies to issue and list shares," Zhou said.

"The move was made mainly because China's listed firms are small and there has been malicious speculation in small caps."

Brokers said Zhou's remarks raised worries that regulators would continue to approve a large number of initial public offerings, a trend that sparked a liquidity squeeze this year.

That, and a crackdown on market corruption, helped slice 36.5 percent off the value of China's share prices since their peak in June 2001.

"Investors believe Zhou's comments indicated a quick market expansion has become the government's established policy," said an analyst of CITIC Securities.

"Some believe his remarks even signalled a quicker pace of new share issues. So they fled the market."

Investors punished market heavyweights, such as Sinopec Corp, the largest capitalized firm on the mainland exchanges. Its A shares, off limits to foreign investors, fell 1.22 percent to 3.24 yuan.

On the B-share markets, Hainan Airlines plunged 9.92 percent to 66.3 US cents after the company announced it would list more than 150 million shares held by employees and founders of the firm on Monday.

Analysts said they expect further falls in the near term.

"Recent continuous steep falls have scared away investors," said an analyst with Guohai Securities.

"We believe the benchmark Shanghai composite index will continue to search for a bottom, possibly at 1,400," he said.

The composite index, which groups A and B shares, closed down 2.48 percent at 1,425.843 points yesterday.

Domestic A shares in another market heavyweight, China United Telecommunications Corp Ltd, fell 1.33 percent to 2.96 yuan, despite news of a rise in the company's mobile subscriber base.

The A-share company, which owns an 57.2 percent indirect stake in China Unicom Ltd, said yesterday that the Hong Kong unit had 2.965 million CDMA mobile subscribers at the end of October, up 30 percent from the end of September.

Shanghai's A index shed 2.46 percent to 1,489.963 points and Shenzhen's fell 2.68 percent to 429.73.

The imminent launch of a long-awaited scheme that allows qualified foreign institutional investors to buy yuan-denominated A shares has prompted overseas foreign exchange markets to price in a more flexible and stronger yuan.

But restrictions slapped on foreign investors - such as a minimum one- to three-year investment period - indicate China's wariness in allowing the yuan to be freely convertible on the capital account, analysts said.

(China Daily November 21, 2002)