CHINA’S shares dived yesterday in volatile trade as fears of a regulatory crackdown on the world’s hottest stock market offset the central bank’s most aggressive move yet to bolster the slowing economy.

    A cut in banks’ reserve requirement ratio (RRR) announced by the People’s Bank of China on Sunday was the largest since the global financial crisis, but markets reacted half-heartedly as traders focused on moves by the securities regulator that they feared could pop a gravity-defying, six-month rally.

    Money market rates fell but corporate bond yields were largely flat, while the yuan weakened about 0.9 percent to 6.203 against the U.S. dollar by late afternoon.

    Stocks had rallied early and at one point touched fresh seven-year highs, with the CSI300 index of the largest listed companies in Shanghai and Shenzhen closing the morning session up 1.2 percent.

    But those gains quickly evaporated in the afternoon on concerns that regulators want to slow the pace of gains in a market that has already bolted more than 80 percent since late November, thanks in large part to borrowed money.

    Securities regulators announced Friday they would allow fund managers to lend shares for short-selling, and ban margin financing through unregulated accounts.

    “The government wants a slow bull market, not a crazy bull,” said Wang Yu, an analyst at Pacific Securities.

    Both the CSI300 index and the Shanghai Composite Index, which tracks all stocks on the Shanghai Stock Exchange, ended down 1.6 percent.

    Zhang Yunyi, general manager of Shanghai-based hedge fund manager Hongyi Investment, expects the market to consolidate for about two months, after climbing seven weeks straight on hopes that the government would pump in more stimulus to lessen the risk of a sharp slowdown in the world’s second-largest economy.

    Economists are unsure how much of the estimated 1 trillion yuan (US$161.2 billion) in cash freed up by the latest 100 basis point reserve cut will find its way into new bank loans and real economic activity, with many suspecting a fair chunk will flow into stocks given their far superior returns to other investments at present.

    Still, some analysts believe the RRR cut was partly designed to cushion the risk of a sharp blow to markets from the securities regulator’s ruling. (SD-Agencies)