China stocks slip 0.9 pct on PetroChina squeeze

(for Hong Kong stock market reports, click [.HK])

SHANGHAI Oct 26 (Reuters) - Chinese stocks fell nearly 1 percent on Friday, extending Thursday's plunge, as PetroChina's (0857.HK) huge Shanghai IPO continued to drain money.

The Shanghai Composite Index .SSEC, which tumbled 4.80 percent on Thursday in its biggest drop since early July, slipped a further 0.91 percent to 5,511.936 points at midday. It hit an intra-day low of 5,462.013.

Losing Shanghai stocks far outnumbered gainers by 578 to 253, and turnover in Shanghai A shares shrank to a very low 44.2 billion yuan ($5.9 billion) from Thursday morning's 61.5 billion.

The squeeze caused by PetroChina's IPO has coincided with growing concern among fund managers that after rising nearly 130 percent in 2007 to this month's peak, the market is too richly valued to continue climbing for now. It is still up 106 percent since the start of the year.

"Investors are worried that the market's too high so they are shifting money to IPOs, which seem certain to rise on listing and so involve less risk," said Li Shiming, analyst at Galaxy Securities.

"It may be hard for the index to return to 6,000 points in coming weeks."

The index is now testing technical support around 5,500 points, where a couple of gaps on the daily chart roughly coincide with the late September peaks.

Analysts say any decisive break below 5,500 could prompt a slide in coming weeks to near stronger technical support at the 5,000 area, where the mid-September low roughly coincides with the mid-August peak.

However, traders say a good part of the selling late this week is due to a temporary factor, the squeeze caused by PetroChina. Desperate selling of bills by smaller securities companies to raise short-term funds pushed bill yields up to multi-year highs on Friday, and there appears to be some similar forced selling of stocks.

Liquidity will improve considerably early next week as money frozen by the PetroChina IPO returns to the market, and this could prompt a rebound of stocks.

Sinopec (600028.SS)(0386.HK)(SNP.N), which slumped 6.69 percent on Thursday, sank a further 4.04 percent to 23.28 yuan. The approach of PetroChina's IPO caused it to soar early this week, but it has since turned down, partly because the pricing of the IPO was lower than many fund managers expected.

China COSCO (601919.SS)(1919.HK) tumbled 8.28 percent to 58.35 yuan, wiping out gains over the previous two days triggered by shareholder approval for a share placement which will finance the purchase of major assets from its parent.

Banks, however, largely firmed after Thursday's big losses, with Pudong Development Bank (600000.SS) up 5.01 percent to 57.83 yuan.

Property shares were strong, partly because of recent appreciation of the yuan, which tends to boost asset values. Vanke 000002.SZ rose 3.13 percent to 34.86 yuan.

Shandong Nanshan Industrial (600219.SS) rose 2.29 percent to 30.83 yuan after saying it would spend about A$5 million to buy a stake in Gulf Alumina Pty Ltd to secure a supply of bauxite.

Dongfeng Automobile Co (600006.SS) surged 3.38 percent to 7.64 yuan after saying third-quarter net profit rose 40 percent.

Yangtze Power Co (600090.SS), which said third-quarter net profit nearly doubled, was up 1.48 percent to 19.87 yuan. ($1 = 7.48 yuan)