By  on June 11, 2008

BEIJING — China's benchmark stock index tumbled 7.7 percent on Tuesday — the steepest decline in a year — underscoring a growing unease among investors about long-term prospects for economic stability.

The Shanghai Composite Index fell by 257 points in the first day of trading since the Chinese central bank said over the weekend that it would tighten credit outflows by raising reserve ratios on consumer banks by 1 percent this month to a record-high level. With the markets closed for the Chinese Dragon Boat Festival on Monday, Tuesday was also the first day of trading since the price of oil hit $140 a barrel, another likely factor in the sell-off, economists said.

Over the weekend, the People's Bank of China said it will increase this month to 17.5 percent the amount of cash banks must hold in reserve, on the heels of growing concern over rising consumer inflation and worries about the cost of damage and rebuilding after the May 12 earthquake in the Sichuan province. The bank has raised reserve ratios multiple times in the past year, hoping in part to help curb record inflation. Consumer prices rose by a near-record 8.5 percent in April and figures for June are due out on Thursday.

Analysts said Tuesday's drop was likely temporary and the markets would recover. "I think the market is overreacting," said Zhai Biao, an analyst with Guotai Junan Securities. "There are emotions involved."

China's volatile stock exchanges, widely considered heavily overvalued, have fallen by 44 percent since the start of this year. On Tuesday, Internet chat sites were ablaze with angry reactions after the stock plunge, with many commenters critical of a perceived failure of government policies to protect investors.

Cautioned one: "Remember, very few people make money in the stock market — it's like getting a ticket for the opening ceremony of the Olympics."

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