Policy reluctance may spell third losing year for China stocks

By Clement Tan and Lu Jianxin

HONG KONG/SHANGHAI, July 23 (Reuters) – Reluctance by the People’s Bank of China to expand money supply in the world’s second-largest economy too rapidly could condemn the country’s stock markets to a third straight year of losses in 2012.

A congested initial public offering (IPO) pipeline is likely to aggravate tight liquidity conditions as Beijing, wary of reigniting inflation, sticks to its “prudent” monetary policy.

In addition, around 500 billion yuan ($78.5 billion) worth of share lockups are set to expire later this year, which could further weigh on the market. The total market capitalisation of Chinese A shares is currently around 22 trillion yuan ($3.5 trillion).

Onshore Chinese markets have completely surrendered gains made earlier in the year, retreating in response to Europe’s debt crisis, economic slowdowns at home and abroad and a recent flurry of corporate profit warnings.

Major benchmark indices such as the Shanghai Composite Index and the CSI300 Index of the top Shanghai and Shenzhen listings have already posted two consecutive annual losses, giving up a third of their market value in the process.

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