What analysts describe as a round of panic selling sent the Shanghai stock market plunging yesterday to its biggest one-day loss in two years.

A short-term rally driven by bargain hunters may be on the horizon, but most brokers are decidedly bearish about long-term prospects. They believe Friday's announcement of an investigation into market irregularities by several banks, a flood of capital-draining initial public offerings and the still-hazy outlines of a plan to float more state-owned shares will serve as further drags on the country's two stock exchanges.

The Shanghai Composite Index, which tracks both yuan-denominated A shares and hard-currency B shares, plummeted 5.27 percent to 1956.82, breaching the psychologically important 2000 mark.

"It seems that a two-year upturn has been destroyed, and the bear has come. That caused a selling spree among horrified investors," said Dai Ming, an analyst at Citic Securities.

The Shanghai A-Share Index fell 5.31 percent to 2042.11, the sixth consecutive day of losses. Trading volume was 8.97 billion yuan (US$1.08 billion), up 29.6 percent from Friday.

The Shanghai B-Share Index fell 3.46 percent to 176.62 in light trading.

The Shenzhen Composite Index dropped 5.5 percent to 577.88.

One of the chief catalysts for the plunge was Friday's announcement by the central bank that it was investigating four commercial branch banks that may have illegally channeled 510 million yuan in loans into the stock market.

"The investigation, which covers a large amount of market capital, suggests the government will take stronger actions to check illegal trading in the market, compared with last year," said Zhang Qi, of Haitong Securities.

Investors also continue to wait for news about the government's plan to sell more state-owned shares. In addition, some 600 billion yuan has been locked up in subscriptions to the initial public offerings of four companies since Thursday, Citic's Dai noted.

Another company listed on Friday, and six more firms are poised to issue IPOs this week, further weakening market sentiment, he added.

(eastday.com 07/31/2001)