China stocks tumble 5.4 percent as IPO prices break

SHANGHAI (Reuters) - China's main stock index sank 5.42 percent to a fresh 11-month closing low on Thursday, its biggest drop since January, as panic over heavy supplies of new shares and slowing corporate earnings growth gripped the market.

Two more major stocks -- China Shipping Container Lines (CSCL) (601866.SS) and China Coal Energy Corp (601898.SS) -- fell below their IPO prices. On Wednesday, China Pacific Insurance (601601.SS) became the first major firm to drop substantially below its IPO price since a ban on offers was lifted in mid-2006.

The drops alarmed the market by suggesting that large institutional investors, who had bought shares in the IPOs over the past several months, were so bearish that they were willing to suffer losses to get out of the stocks.

"The panic has grown like a like snowball, and spread from individual to institutional investors. No one knows what if any plan the authorities have to restore confidence," said analyst Chen Jinren at Huatai Securities.

The benchmark Shanghai Composite Index .SSEC ended at 3,411.493 points, just off its intra-day low of 3,407.896. It is down 22 percent so far this month, and 44 percent below October's record peak.

Losing Shanghai shares far outnumbered gainers by 831 to 70, with over 25 Shanghai A shares dropping their 10 percent daily limits. Turnover in Shanghai A shares remained thin at 76.7 billion yuan ($10.9 billion) against Wednesday's 70.3 billion.

Oil giant PetroChina (601857.SS), the most heavily weighted stock, slid 8.31 percent to a record closing low of 16.99 yuan, continuing a slide triggered by its disappointing 2007 earnings last week. It set a fresh record intra-day low of 16.94 yuan, near its IPO price of 16.70 yuan.

Baosteel (600019.SS), China's biggest steel maker, tumbled 8.99 percent to 13.06 yuan after announcing late on Wednesday that net profit slid 3 percent to 12.72 billion yuan last year -- the first annual fall since 2001. The result was nearly 10 percent below analysts' consensus forecast.

CHART SUPPORT BREAKS

The index's fall on Thursday appeared to mark a clean break of technical support at 3,561 points, the 50 percent retracement of its bull run from June 2005.

It bounced during the day from near its June 2007 low of 3,404, which was reached during a slide triggered by a hike in the stock trading tax last May. Some traders see at least short-term support there.

"But if the index cannot find support at the 3,400 level, the 3,000 level will become quite likely," said analyst Zhang Qi at Haitong Securities.

Major Chinese brokerage Shenyin & Wanguo Securities said in a report on Thursday that the index was likely to continue setting new lows in the second quarter of this year, though it would rebound in the second half of 2008 as inflation eased and corporate profit growth started catching up with high valuations.

Concern about an imbalance between supply and demand in the market has worsened this month as tens of billions of yuan worth of shares have become newly tradable with the expiry of lock-up periods related to IPOs and reform of state shareholding systems.

Fuelling the supply worries, Jinduicheng Molybdenum Co, Asia's largest producer of molybdenum, said on Thursday that it would launch on Friday a Shanghai initial public offer that could raise over $2 billion.

Meanwhile, fears of a sharp slowdown in corporate earnings growth have increased with signs of weakness in the U.S. and Chinese economies.

Thomas Deng, managing director of Goldman Sachs Asia Pacific investment research, said on Thursday that he now expected China's overall corporate earnings growth in 2008 to be 15-20 percent, instead of the 30 percent predicted previously.

He estimated Chinese companies' domestically listed A shares were roughly twice as expensive as their Hong Kong-listed H shares, meaning slower earnings growth could keep the A shares under pressure.

Reflecting worries about excessive A-share valuations, the average premium of A shares over H shares .HSCAHPI shrank to 51 percent on Thursday, the smallest gap since early December, from 59 percent on Wednesday.

Another sign of investors punishing high valuations came on Wednesday when PetroChina lost its status as the world's largest company by market capitalization. Its market value dropped by about $10 billion to $452 billion, below $456 billion for rival Exxon Mobil (XOM.N).

LITTLE GOVERNMENT ACTION

Many analysts think the market may not start a solid recovery until regulators take strong action to boost it.

While there is little evidence so far that the market's slide is hurting the real economy, the collapse of investor confidence threatens to destroy the government's success last year in making the market a viable fund-raising venue for companies, and in creating an equity culture among ordinary Chinese.

Beyond modest steps such as approving the creation of a string of new mutual funds, however, regulators have so far not shown signs of taking major measures to support the market, such as changing tax policies.

A lack of coordination among government agencies, as well as a desire to discourage excessive speculation in stocks, may be responsible.

Among Thursday's losers, China Pacific Insurance sank 7.47 percent to 25.89 yuan after an 8.11 percent drop on Wednesday, when it slid below its December 2007 IPO price of 30.00 yuan.

China Shipping Container Lines fell to a record low of 6.50 yuan on Thursday, below its 6.62 yuan IPO price, before closing down 5.65 percent at 6.51 yuan.

China Coal Energy, which listed on February 1, dropped 9.93 percent to 16.69 yuan, below its IPO price of 16.83 yuan.

China Construction Bank (601939.SS) ended 5.47 percent lower at 6.57 yuan after hitting a low of 6.46 yuan, just above its IPO price of 6.45 yuan.

Among Thursday's few gainers, Anhui Huaxing Chemical Industry 002018.SZ rose 4.08 percent to 44.11 yuan after it forecast net profit would soar between 1,100 and 1,200 percent in the first quarter because of rising production, higher product prices and lower tax rates.

($1 = 7.01 yuan)

(Reporting by Claire Zhang; Editing by Andrew Torchia)