For the second week in a row, China’s stockmarkets have refused to heed the assurances of senior officials and have fallen; last week’s drop enough to put them into correction territory, down 6.5% last week and more than 12% in the past fortnight. It was the second largest drop this year and has wiped all the gains since July 1.

The falls are linked to continuing concerns about the country’s monetary policy stance.

Most of the fall last week came on Thursday and Friday and came despite repeated assurances that policy wouldn’t change from the central bank, senior economic officials the week before, and even Premier Wen Jiabao.

The basically solid economic data for last month released midweek didn’t help, especially news of a sharp fall in bank lending in July, even though that was widely expected after the enormous surge in the June half year.

Official concern at flagging stock prices was signalled on Friday by Shang Fulin, chairman of the China Securities Regulatory Commission, who tried to boost confidence by stating “the market’s internal and external environment is further improving”.

However, his comments appeared to have little effect on concerns that Beijing may seek to limit levels of lending after new loans tripled for the first half compared with the same period a year ago. A week before the Government trotted out a senior member of the central bank to try and reassure investors that monetary policy would not be tightened.

The Shanghai index fell 3% on Friday after a similar sized fall on Thursday, after the release of the usual run of monthly economic data that confirmed the economic recovery in China is still happening.

The slump so far hasn’t spread to other markets in the region.

China Daily reported over the weekend on its website: “China’s top banking regulator Liu Mingkang urged the country’s joint-stock commercial banks Friday to strengthen management over risks and closely monitor the flow of capital to prevent credit risk.

“Liu’s comment came as concerns over risks in the country’s dramatic increase in new loans remained, though new loans in July fell sharply from earlier months.

“We should be clear-headed that the current situation remains very grim,” Liu said at a joint conference of presidents of the country’s joint-stock banks.

“All banks should pay close attention to new developments in the economic and financial sectors, and carefully watch risks and factors that may impact the stability of the financial system,” Liu said.

That will get the punters worried.

Peter Fray

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