China's shares closed lower yesterday as investors cashed out of bank stocks, worried that a government-ordered hike in bank reserve requirements would lead to a liquidity crunch, brokers said.

The benchmark Shanghai composite index, grouping hard-currency B shares and yuan-denominated A shares, fell 16.707 points, or 1.16 percent to 1,422.176 points, when the Shenzhen sub-index also dropped 27.20 points, or 0.86 percent to end at 3,181.07.

On Saturday, the People's Bank of China said it would raise reserve requirements imposed on banks and other deposit-taking institutions to 7 percent from 6 percent, beginning on September 21.

The move was aimed at putting the brakes on an overheating economy. Analysts said investors expected the bank reserve hike to reduce bank lending and exacerbate tight liquidity already plaguing a bearish market.

"It extended a nearly five-week slide in China stocks, with market heavyweights such as bank stocks leading losses," said analyst Wu Kan at Shanghai Securities Consulting Co Ltd.

Shares in China Merchants Bank, the biggest of China's four listed banks, were among the top 10 most actively traded counters and ended down 1.78 percent at 10.51 yuan.

The Shanghai composite index has slipped 7.61 percent since mid-July, hit by negative factors including tightened bank loans and a rash of stock offers.

Yesterday's fall was compounded by a large, impending initial public offering by mainland lender Huaxia Bank, analysts said.

Huaxia Bank will issue 1 billion A shares on Tuesday, raising more than 5 billion yuan (US$600 million) to shore up its capital. Its pricing of 5.60 yuan per share, or 20 times historical earnings, making it much cheaper than listed bank stocks.

"Some investors sold bank stocks to prepare for Huaxia Bank's IPO, which seems alluring in a weak market," Wu said.

China Mingsheng Banking Corp Ltd, the smallest among the four listed lenders, underperformed the market with shares falling 2.11 percent to 8.82 yuan.

The Shanghai B-share index fell 1.34 percent to 98.801 points, while its Shenzhen counterpart edged down 0.04 percent to 223.87.

Shares of Chinese companies listed in Hong Kong were also thrashed as fears grew it would be harder for companies to borrow money to expand and that less speculative money would head for the territory's market.

The H-share index of Hong Kong-listed mainland companies skidded 4.72 percent.

In the futures market, Shanghai copper futures fell yesterday with Chinese investors disappointed because the London Metal Exchange failed to hold near its intra-day high on Friday, but trade was slow due to a UK holiday, traders said.

The most active January copper contract fell 100 yuan to 17,830 yuan (US$2,153) a ton, while most other futures ended 60 to 110 yuan lower. Combined volume shrank to 35,994 lots from an already paltry 36,912 lots on Friday.

"Although the LME rose by the close on Friday, it failed to maintain its intra-day highs, which dampened sentiment in China," said a trader in Shanghai.

Brisk buying in early trade boosted LME three-month copper to an intra-day high of US$1,787 a ton, but it fell back to end at US$1,771 on Friday from US$1,757 a day ago, traders said.

The LME was closed for a bank holiday yesterday.

Spot copper in Shanghai stayed flat at a range of 17,700 yuan to 17,780 yuan on Monday.

Shanghai aluminium futures ended little changed from 20 yuan higher to 30 yuan lower, shrugging off LME movements. Combined volume dropped to 6,960 lots from Friday's 12,516 lots.

LME aluminium tracked copper to rise US$17 to US$1,433 in Friday's curbed trading.

(China Daily August 26, 2003)