China stocks post biggest weekly loss in a decade

SHANGHAI (Reuters) - China's main stock index closed Friday with a weekly loss of 8 percent, its biggest weekly drop since May 1997, as investors retreated from the market because of worries about government policy and heavy supply of new shares.

The Shanghai Composite Index ended down 0.27 percent at 5,315.540 points, its lowest finish since September 14, after moving between positive and negative territory. On Thursday it plunged 4.85 percent, its largest daily drop in four months.

Losing Shanghai stocks outnumbered gainers on Friday by 499 to 336. Turnover in Shanghai A shares was a very small 79.9 billion yuan ($10.8 billion), near a 15-week low.

A bull run in Chinese stocks pushed the index up 129 percent between the start of this year and a record intra-day high of 6,124 points in mid-October.

But since then investors have been discouraged by tightening monetary policy, authorities' curbs on fund flows into stocks, a flood of new share offers, high valuations and sagging foreign stock markets.

"The market will continue consolidating for weeks -- nobody knows when it will reach a short-term floor, so nobody dares to buy much now," said Xu Yinghui, analyst at Guotai Junan Securities.

Friday's close left the index down 13 percent from its peak, although it is still 99 percent higher than its level at the start of this year.

Fund managers and analysts generally think the market's long-term uptrend will resume early next year. Corporate profit growth is expected to slow but remain strong, and though Chinese authorities have been seeking to cool the market, they do not want to cause a crash.

In the short term, however, few traders see room for a major rebound.

"The index is unlikely to hit a new record this year, though it will in 2008," said Wu Lei, analyst at CITIC-Kington Securities.

"The outlook for the future is good, but many investors have lost a lot in the present and they cannot wait for the future to arrive."

Wu and some others said the index was likely in coming weeks to drift down to technical support around 5,000 points, the objective of a bearish right triangle triggered on Thursday.

Some blue chips partially recovered on Friday. Sinopec (600028.SS)(SNP.N), which plunged 7.10 percent on Thursday, jumped on Friday afternoon to close 3.87 percent higher at 23.36 yuan in response to a 5 percent gain by its Hong Kong-listed H share (0386.HK)

Goldman Sachs raised its rating for the oil refiner's H share to buy from neutral, though it only lifted the A share to neutral from sell.

Bank of Communications (601328.SS)(3328.HK) climbed 4.59 percent to 15.50 yuan and Minsheng Banking Corp (600016.SS) gained 4.23 percent to 17.51 yuan after Reuters reported they would be among the first group of settlement banks for the country's planned stock index futures trade.

Property shares were boosted by this week's faster yuan CNY=CFXS appreciation against the dollar, with Shanghai Xinmei Real Estate (600732.SS) up 6.72 percent to 8.42 yuan.

But many industrial stocks stayed weak. PetroChina (601857.SS)(0857.HK), which soared in its debut on Monday, edged down 0.03 percent on Friday to 38.18 yuan.

Merchants Bank (600036.SS)(3968.HK) gained 1.78 percent in the morning after obtaining approval from the U.S. Federal Reserve to open a branch in New York, but closed 0.95 percent down at 40.66 yuan.

Zhejiang Holley Technology (600097.SS) slumped 7.40 percent to 12.02 yuan after saying its main shareholder had sold shares in it.

($1 = 7.41 yuan)

(Reporting by Claire Zhang, editing by Andrew Torchia)