China's share prices tumbled 4.5 percent on Tuesday as investors panicked at news that the country's consumer price index (CPI), the marker of inflation, rose by 6.5 percent in August, the highest monthly rise in 11 years.
The benchmark Shanghai Composite Index on the Shanghai Stock Exchange closed at 5,113.97 points on Tuesday, down 241.32 points.
The Shenzhen Component Index on the smaller Shenzhen Stock Exchange dropped 4.4 percent, or 789.09 points, to end at 17,129.39.
"This correction is within expectation and is directly due to profit-taking," said Zhu Ping, analyst with Guangfa Fund management Co.
Combined turnover of both bourses was 263 billion yuan (US$34.6 billion), higher than Monday's turnover of 238.84 billion yuan.
"The market correction was necessary as share prices had risen too fast and there has been some bad news for the market recently, " said Yang Chengzhang, chief economist at Shenyin and Wanguo Securities.
More than 1,400 of the total 1,664 stocks dipped, with banks and property developers leading the downward spiral.
The heavyweight Industrial and Commercial Bank of China went down 5.6 percent, the Bank of China decreased 4.4 percent and Vanke Group, China's flagship property developer by market value, dropped 5 percent.
Food prices rose by 18.2 percent in August, while prices of non-food products rose 0.9 percent, the National Bureau of Statistics (NBS) said on Tuesday.
The CPI increased 5.6 percent in July, 4.4 percent in June and 3.5 percent in first seven months over the same period last year, according to the NBS.
The rising inflation rate, a sign of overheating of the already hot economy, is triggering fear that the government will mete out even more measures to control excessive liquidity.
The People's Bank of China (PBOC) had decided to raise the reserve requirement ratio by half a percentage point for commercial banks to 12.5 percent from September 25 in an effort to "control excessive bank lending", said the central bank in a statement last week.
The move came after China reduced the tax on interest income to five percent from 20 percent from August 15, and raised the benchmark interest rate for four times this year.
Meanwhile, the Ministry of Finance has increased the issue of treasury bonds to reduce liquidity in the banking system.
The country's commercial banks lent 2.77 trillion yuan (US$369.33 billion) from January to July, equivalent to 90 percent of last year's total.
(Xinhua News Agency September 12, 2007)
