China's stock market saw a sharp decline in transaction and market capitalization in May, as fast market expansion and growing potential of a near-term interest rate hike hurt the sentiment of investors.

According to statistics of the China Securities Regulatory Commission, transaction in the Shanghai and Shenzhen bourses was 180 billion yuan (US$21.7 billion) in May, down by 65.5 percent from April.

The overall capitalization of A shares and B shares also lost 106.2 billion yuan (US$12.8 billion) in May to 4.47 trillion yuan (US$539.8 billion) by the end of the month, CSRC statistics said.

Analysts said that the sluggish market performance was due to tightened fund supply, mounting inflationary pressure and a slew of fund embezzlement scandals that have eroded investor confidence.

Last month, 10 companies kicked off A share offerings in Shanghai, raising 5.2 billion yuan (US$628 million) from the bourses, up 338 percent on a year-on-year basis. Some listed companies also launched refinancing projects, collecting 5.8 billion yuan (US$700 million) via rights share and convertible bond offerings during the month.

That further decreased the market liquidity, which is already limited as the banking authorities tightened the money bases, said Li Yong, head of the research institute of Everbright Securities.

Moreover, China's macro economic figures point to a growing trend of inflation, as the consumer price index rose by 4.4 percent last month, which added to the possibility of an interest rate hike.

The market panicked on the uncertainty of economic trends, Li said. Talks of an impending launch of the qualified domestic institutional investor (QDII) scheme further dampened market sentiment as the scheme would divert more funds from the domestic market to overseas.

Liu Qingshan, a fund manager with ABN AMRO Fund Management Co, said that investors had over-reacted to the expectation of an interest rate hike and the QDII launch and should become more rational later on.

(China Daily June 16, 2004)