China's Stocks Nosedive 8% At Monetary Tightening

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% to close at 3,072.33 points, the biggest loss in percentage points since June 4, 2007 when the gauge lost 8.26%. The meltdown came after the People's Bank of China (PBOC) ordered banks during the weekend to set aside 17.5% of their deposits as reserves, up from the initial record 16.5%. The 1% hike was unusual as the PBOC has hitherto usually increased the ratio by half that number.

The move is aimed at strengthening 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 have grown by 17% last month year-on-year, compared with 16.9% in April, Dow Jones Newswires said Monday. Both figures are higher than the target of 16% 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 signalled that the central bank will stick to its tight monetary policy.

This policy makes it more difficult and costly for companies to acquire 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% year-on-year in April. While the CPI growth is widely believed to ease slightly to less than 8% in May, figures – to be released on Thursday – remain high-level

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