China's equities suffered their biggest fall in a year on Tuesday, after the central bank raised the commercial banks' reserve ratio for the 15th time since January 2007.
The benchmark Shanghai Composite Index tumbled 7.73 percent to close at 3,072.33 points, the biggest loss in percentage points since June 4, 2007 when the gauge lost 8.26 percent.
The meltdown came after the People's Bank of China (PBOC) ordered banks during the weekend to set aside 17.5 percent of their deposits as reserves, up from the initial record 16.5 percent. The hike was unusual as the PBOC usually increased the ratio by 0.5 percentage points each time.
That move aimed to strengthen liquidity management in the banking system, the PBOC said in its statement. Analysts said the hike may be a result of a pickup in the money supply in May.
China's broad money supply may grow to 17 percent last month year-on-year, compared with 16.9 percent in April, Dow Jones Newswires said Monday. Both figures are higher than the target of 16 percent set by the central bank for this year.
While the reserve ratio rise reduced the amount of cash available for lending, thus curtailing the potential money flows into the stock market, it signaled that the central bank will stick to its tight monetary policy.
This policy makes it more difficult and costly for enterprises to get loans from banks, eroding their profitability, which is the foundation for a bull market.
Economists have expected the central bank to ease the credit in the second half of this year, as the country's economy slows down due to a possible recession in the United States.
However, any loosening in monetary policy will be a tough call, as China is experiencing its highest inflation in a decade. The Consumer Price Index (CPI), a barometer of inflation, jumped 8.5 percent year-on-year in April.
While the CPI growth is widely believed to ease slightly to less than 8 percent in May, it is still at a high level. The figures will be released on Thursday.
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Investors fear regulators might resort to further monetary tightening after the reserve ratio increase, including interest rate hikes, to bring down inflation and prevent a rebound in investment.
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China's rapid economic growth, another foundation for China's bull market, is also set to slow down, according to Xu Xianchun, deputy director of the National Bureau of Statistics. Double-digit growth in the past five years is hard to sustain, he said, while taking into account the global slowdown.
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These concerns prompted investors into panic selling, pushing down the Shanghai Composite Index down by as much as 8.53 percent, before bargain-hunters returned to help the index recover part of the loss.
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Only 32 stocks out of about 1,500 in total in the Shanghai and Shenzhen bourses posted gains, while nearly 1,000 stocks dropping their daily limit of 10 percent, or 5 percent.
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