China's Benchmark Stock Index Drops

China's stocks dropped, dragging the benchmark to almost 50 percent below its October record, as a government campaign to restrain inflation turned the world's most expensive major market into this year's worst performer.

Citic Securities Co., China's biggest publicly traded brokerage, and Kweichow Moutai Co., which makes the fiery liquor used at official banquets, led a ninth day of declines amid speculation central bank policies will erode corporate earnings.

The CSI 300 is down 45 percent this year, the most among benchmark indexes from the world's 20 biggest equity markets, as China's government stepped up efforts to control increases in consumer prices. Chinese equities have lost $1.74 trillion in market value this year.

It had climbed almost sixfold in two years as China's economic growth surged and an influx of more than 300,000 investors a day pushed shares on the index to the most expensive valuation among the world's largest stock markets.

A gauge tracking financial stocks rose 0.9 percent today, the only increase among the CSI 300's 10 industry groups. The measure of financial shares tumbled 17 percent last week.

The central bank has moved to curb lending by raising the proportion of deposits that banks must set aside as reserves to a record 17 percent starting June 15, an amount that rises to 17.5 percent from June 25. The benchmark one-year lending rate stands at 7.47 percent after six increases last year.

The CSI 300 dropped 19 percent in the past nine days, matching a losing streak of as many days that ended on Aug. 7, 2006. The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, added 0.2 percent to 2,874.10, its first advance in nine days. It closed last week at its lowest since March 6, 2007.

China, Bloomberg
6/16/2008 6:30:06 AM