Stocks on the Chinese mainland suffered a sharp decline on Monday as concerns of possible expansion of policy tightening measures triggered a sell-off in the property and banking sectors.
On Monday, the benchmark Shanghai Composite Index fell 3.03 percent to close at 2706.66, the biggest plunge in two months, after the People's Bank of China raised the reserve requirement ratio (RRR) for domestic lenders by 50 basis points on Friday.
"The RRR hike was the direct trigger of the market's fall," said Tang Yonggang, a strategist at Hongyuan Securities.
"It reinforced investors' expectation of further monetary tightening."
Property developers and lenders led the decline with China Vanke Co, the country's largest listed developer, dropping 6.96 percent and China Construction Bank sliding 4.71 percent.
The inflation risk and the expectation that the policy tightening measures may be expanded will continue to "haunt" the A-share market at least in the first half of the year, Tang said.
Net new loans were reported to have increased 600 billion yuan ($91 billion) in the first week of 2011 and analysts suspected large net inflows of international "hot money" will continue to rise on expectations of steady yuan appreciation against the US dollar.
"This indicated that the pressure to further tighten monetary policy remains high," Sun Chi, economist at Nomura Securities, said in a report.
Despite the latest round of policy tightening, the Chinese economy still runs the risk of overheating in 2011 and the consumer price index, a main gauge of inflation, is likely to jump to 7 percent in the first quarter of the year, said Yao Wei, chief economist for China at the French bank Societe Generale.
"Inflation expectation management remains a challenging task for the Chinese central bank," Yao said. "If the central bank fails to anchor the inflation expectation well, it will further push up the domestic prices."
The stock markets of emerging economies recently experienced a round of sell-offs on global investors' growing concern of the rampant inflation. Bangladesh's stock market plunged by 9.3 percent last week while the markets in the Philippines and Indonesia also tumbled by more than 4 percent.
Analysts suspected that the inflation risk in emerging economies and the central banks' failure to anchor the inflation expectation could lead to a reversal of capital flows from emerging markets into developed economies.
"If the emerging-market world is going to allow itself to run too hot and overheat, you'd want to be a seller into emerging markets at that point," Adam Levinson, co-chief investment officer of global macro funds at Fortress Investment Group LLC, was quoted by Bloomberg as saying.
The Shanghai Index has fallen 3.6 percent in 2011 and it extended last year's 14 percent decline as one of the worst performers globally after the Chinese government ordered six increases in reserve requirements and raised interest rates twice in 2010 to curb inflation and avoid asset bubbles.
