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By Dong Zhixin (chinadaily.com.cn)
Updated: 2008-01-22 10:47

People stand in front of an electronic board at a stock exchange in Nanjing, Jiangsu province January 21, 2008. China's stock market plunged on Monday in response to another tumble by Hong Kong share prices and news of heavy cash calls.[Agencies]

Chinese investors continue to dump shares in panic sellings on Tuesday, driving the key Shanghai index down as much as 7 percent after a 5 percent loss in the previous session.

The benchmark Shanghai Composite Index nose-dived 6.9 percent within 30 minutes of the opening of trading, to 4,575.53 points, the sharpest fall in half a year. It recovered part of the loss to regain the 4,700-mark, as bargin-hunters return.

Related readings:  China's stock market plunged on Monday  Asian stocks open sharply lower Tuesday  HK stocks plummet 5.49% in worst day-slump since 2001  Black Monday for Chinese stocks, down 5%

Analysts blamed the sell-off on investors' growing worries over excessive liquidity in the country's equity market, as policymakers have shifted to a "tight" monetary policy from the decade-old "prudent" one to prevent the economy from overheating and tame inflation.

Coupled with less money available for investment was an increasing supply of shares.

Ping An Insurance, listed in both Shanghai and Hong Kong, announced on Monday a plan to raise some 150 billion yuan through new shares and bonds, the largest re-financing plan in the history of the country's stock market.

That sparked fears that other big firms might follow suit, resulting in a jump in the number of outstanding shares. In theory, when supply outstrips demand, the price will fall.

Another negative factor is concerns about the impact of a potential US recession on the Chinese economy.

Fears are mounting in the United States that the sub-prime crisis might pull the country's economy into a recession, prompting President George W. Bush to call for up to $150 billion in tax relief for consumers and business to boost the economy.

China's exports will be badly hit if consumer demand weakens in the US -- a major destination for Chinese exports, Zhang Tao, deputy head of the international department of the People's Bank of China, told a financial forum during the weekend.

A drop of 1 percentage point in US economic growth would shave 1.3 percentage points from China's growth rate due to lower exports, Citigroup estimates.