Chinese equities saw their sharpest dip in seven weeks on Wednesday after the central bank asked lenders to set aside more reserves as record bank lending last year ignited fears of inflation and asset bubbles.
The benchmark Shanghai Composite Index went down 3.09 percent, or 101.31 points, to close at 3,172.66 points.
The Shenzhen Component Index lost 2.73 percent, or 364.69 points, to close at 13,016.56 points.
Combined turnover expanded to 322.79 billion yuan (47.69 billion U.S. dollars) from 294.3 billion yuan on the previous trading day.
The People’s Bank of China announced on Tuesday evening to lift deposit reserve requirement ratio by 0.5 percentage points from Jan. 18, the first such move since June 2008, which aimed to prevent possible inflation and the recurrence of lending surge.
Banks led the fall as investors worried about liquidity drain. Industrial and Commercial Bank of China (ICBC), the country’s largest commercial bank, sank 5 percent to 5.09 yuan. Bank of China fell 4.17 percent to 4.14 yuan.
A higher reserve ratio would help soak up excess liquidity in the banking sector, but capital would remain abundant in the market, said Wang Xiaoguang, analyst with the National Academy of Governance, a government think-tank.
He said the new policy would stir up volatility in the capital market in the short-term, but the long-term prospects would remain positive as the real economy would keep growing.
Chinese lenders extended a record 9.21 trillion yuan of loans in the first 11 months of last year, 5.06 trillion yuan more than the corresponding period of 2008 and far exceeding the government target of 5 trillion yuan for the whole of 2009.
Realty firms dropped as the government reaffirmed its crackdown on property speculation and pledged 6 million new affordable homes this year.
China Vanke Co., the country’s largest property developer by market value, fell 2.43 percent to 10.04 yuan. Poly Real Estate Group Co., the country’s second largest developer, dipped 4.13 percent to 20.43 yuan.
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