Monday August 31, 09:40 AM

China stock index dives 5 pct, below key support

SHANGHAI (Reuters) - China's main stock index fell more than 5 percent on Monday to a three-month low, breaking below the key 125-day moving average used by Chinese investors to delineate a bull versus a bear market, as a series of negative factors has relentlessly weighed down the market since early August.

"Liquidity worries, too much share supply and weakening investor sentiment prevailed in the market today, although these are not fresh negative factors," said Qian Qimin, deputy head of research at Shenyin & Wanguo Securities in Shanghai.

The Shanghai Composite Index plunged as much as 5.4 percent to 2,706.129 points, putting it on track to post a more than 20 percent loss for the month after recording seven consecutive monthly gains.

The index is well below the 125-day moving average, now at 2,755 points, although analysts said it would still take two or three days to confirm whether the key technical level has been effectively breached.

Continuing a stream of fresh shares flowing into the market, Metallurgical Corp of China's Shanghai A-share initial public offering, which aims to raise about 16.85 billion yuan ($2.47 billion), will start book-building on Tuesday and take subscriptions next week.

Monday's fall came after the index closed down 2.9 percent on Friday as sources familiar with the situation told Reuters that regulators warned banks not to rush into end-of-the-month lending amid signs of a steep drop in Chinese bank lending in August.

Analysts said that, while the slowdown in lending would trim liquidity flowing into stocks, it should have no major impact on the economy, partly because Chinese firms are turning a large share of the short-term discounted bill financing they received in the first half of this year into long-term investment in the second half.

"Although July data showed China's economic recovery may not be as quick as the markek had once expected, it is still on track," Qian said.

On the positive side, state media reported on Monday that the combined net profit of China's 1,600-plus listed companies grew 36 percent in the second quarter of this year from the first quarter, a good omen for corporate earnings for all of 2009.

China's Baosteel, the world's third-largest steelmaker, fell 7.1 percent to 6.41 yuan after saying its net profit for the first half of this year dropped 93 percent, but it expected improvement in the second half of the year.

PetroChina, the most heavily weighted stock in the index, fell 5.25 percent to 13.00 yuan, after posting its first profit in three quarters on Friday as higher fuel prices in China offset a steep slide in crude oil prices.