October 18, 2007 / 7:21 AM / 12 years ago

Shanghai stocks end down 3.5 pct on HK swap fears

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

SHANGHAI, Oct 18 (Reuters) - Chinese stocks closed more than 3 percent lower on Thursday, their biggest drop in five weeks, on news that Beijing was studying a proposal to permit the exchange of shares listed in both the domestic stock market and Hong Kong.

Such an arbitrage scheme could drag down the prices of domestic shares by shrinking the vast premiums, now averaging nearly 50 percent, of A shares over Hong Kong-listed H shares.

The Shanghai Composite Index .SSEC ended down 3.50 percent at 5,825.282 points, near its intra-day low of 5,804.973. Losing Shanghai stocks outnumbered gainers by 664 to 186.

Turnover in Shanghai A shares shrank to a two-week low of 128.7 billion yuan ($17.1 billion) from Wednesday’s 131.7 billion.

Capital controls and the complexity of any arbitrage scheme mean it would probably take many months to launch, and it is unclear how actively the scheme could be used.

Fund managers and analysts said they did not think the government would want to risk a collapse of the domestic market, since the development of a strong market is a key goal of economic policy.

But they saw the news as a strong signal that Chinese authorities wanted to cool the market, where the benchmark index soared as much as 129 percent between the start of this year and an intra-day high on Tuesday this week.

Several analysts and fund managers said the index might fall in coming days to technical support in the 5,500-5,600 area, where it briefly peaked in late September. It might then stabilise for a while as investors waited for more concrete signs of authorities’ intentions.

Dual-listed shares were among the heaviest losers on Thursday, particularly banks. Industrial & Commercial Bank of China’s A shares (601398.SS) sank 4.02 percent to 7.64 yuan, though its H shares (1398.HK) in Hong Kong rose 0.74 percent.

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