China Shares End Near 4-Month Low On Tight Liquidity

China's shares ended at a near four-month low Tuesday led by metals firms, after benchmark money market rates hit a more than three-year high because of last week's hike in banks' required reserves and cash demand ahead of the Lunar New Year holiday.

The benchmark Shanghai Composite Index, which tracks both A and B shares, ended down 0.7% at 2677.43, its lowest closing level since it ended at 2655.66 on Sept. 30. The Shenzhen Composite Index fell 1.2% to 1136.58.

Analysts said they expect the Shanghai index to find immediate support at 2650 for the rest of this week, as the People's Bank of China is unlikely to take fresh tightening measures given tight liquidity conditions.

"The market is likely to consolidate with a downward bias in the near term as Beijing will keep interest rates steady, at least before the holiday," said Zhang Gang, an analyst from Central China Securities. China's Lunar New Year holiday starts Feb. 2 and ends Feb. 8.

China's benchmark seven-day repurchase agreement rate rose 245 basis points to 7.72% Tuesday, the highest level since Oct. 25, 2007, when the rate rose to 8.90%.

Tight liquidity conditions prompted China's central bank to suspend bill sales in its regular open-market operations for the second consecutive week. Excluding reverse repos, the PBOC effectively injected CNY249 billion into the money market last week, and it could inject a further CNY170 billion this week if it doesn't sell any repos Thursday.

"The tight liquidity in the money market indicates that less money can flow into the stock market," said Garry Lu, an analyst at Guangzhou Securities.

Metals companies led the declines for the second consecutive session, following a decline in global metals prices and amid concerns over a reform of China's resources tax.

China plans to fully implement a reform of its resource tax system within the next five years, the Shanghai Securities News reported Tuesday, citing Finance Minister Xie Xuren.

"The tax will hurt domestic miners' earnings, as they don't have the capability of raising product prices to digest the higher costs," said Liu Minda, an analyst at Huatai Securities.

Zijin Mining fell 3.1% to CNY6.68, extending a 1.9% fall Monday, and Jinduicheng Molybdenum Co. was off 3.7% at CNY20.07, adding to a 1.8% decline in the previous session.

At 0728 GMT, base metals on the Shanghai Futures Exchange and London Metal Exchange were both down, with the Shanghai April copper contract settling down 0.9% at CNY71,240 a metric ton, and London three-month copper down 1.2% at $9426.5 a metric ton.

Steel makers bucked the downward trend because of upbeat earnings expectations for 2010 and hopes domestic steel makers may export more steel products in the coming months.

Daye Special Steel was up 3.8% at CNY14.60 after it said Tuesday it expects its 2010 net profit rose 50%-100%, and Baoshan Iron & Steel was up 2.0% at CNY6.76.