By Dong Zhixin
Chinese stocks seesawed on Monday in response to an increase in interest rates and bank reserve requirement announced on Friday.
The benchmark Shanghai Composite Index opened at 3,902.35, a decrease of 3.18 percent from the close of last session. However, the index quickly recovered the lost ground and raced into positive territory in half an hour before returning to the negative shortly.
Bank stocks are weak. Huaxia Bank has fallen 3.7 percent to 12.22 yuan per share by 10:40am, followed by China Merchants Bank which lost 3.37 percent to 20.06. The Industrial and Commercial Bank of China declined 1.82 percent to 5.39 yuan while Bank of China dipped 2.07 percent to 5.69 yuan.
On Friday, the central bank raised benchmark one-year interest rate by 0.27 percentage points to 3.06 percent, and one-year lending rate by 0.18 percentage points to 6.57 percent. It also ordered commercial banks to set side 11.5 percent, up from 11 percent, of their deposits as reserves.
That marked the first simultaneous use of the two monetary tools in a decade, as well as the eighth increase in reserve ratio since last July and fourth interest rate hike since last April.
Also on Friday, yuan's daily trading limit against the US dollar was widened to 0.5 percent from 0.3 percent.
The Shanghai Composite Index has soared 50 percent so far this year on top of a 130 percent rally in 2006, promoting worries of bubbles building in the market.
Bubbles in the stock market is a concern, said central bank governor Zhou Xiaochuan earlier this month. The China Securities Regulatory Commission has demanded the brokers to educate investors on the risk in stock investment.
However, the retail investors have tended to ignore the warnings and government's tightening policies. The Shanghai and Shenzhen market rose after the interest rate was hiked in March and the reserve requirement rose in April.
This kind of neglect of policy and blindly pushing up the equity market fosters a big market risk, said Zuo Xiaolei, chief economist of China Galaxy Securities said in an article earlier this month.
"China's equity market is starting to show signs of getting out of control," said Zuo.
Professor Ning Xiangdong of Qinghua University agreed. "People are crazy now. They talk about stock issues at work, at home ... they only care about speculation, they don't care about what the government has done to control the economy."
CITIC Securities analyst Ma Qing expressed worries about the situation. "It's time to despair if the bourse continues to rise on Monday."