In the sharpest correction in over a month, the stock market plunged over 3 percent yesterday, reversing a spectacular bull run of past weeks.

News that the central government was studying the possibility of share swaps between stocks listed on the mainland and in Hong Kong brought down the Shanghai Composite Index by 3.5 percent, or 211 points, to close at 5825.28.

The Hang Seng Index, on the other hand, rose 0.58 percent to close at 29468 after breaking through the 30000-mark in the morning session.

"The share swap raised investor expectation of the price gap narrowing between Hong Kong shares and their yuan-denominated counterparts on the mainland," said Wu Feng, an analyst at TX Investment Consulting Co Ltd.

A shares on an average enjoyed a 155 percent premium over their H-share counterparts on Wednesday, according to data from HSI Services Ltd.

Most dually listed stocks fell on the Shanghai bourse yesterday. The A share of China Oilfield Services Ltd sank 8.14 percent to close at 45.24 yuan, while its H share jumped 9.457 percent to close at 20.95 yuan. Shenhua Energy tumbled 6.54 percent to close at 82.26 yuan while its H share climbed 0.1 percent to 51.25 yuan.

Air China dived 9.84 percent to close at 22.82 yuan, while its H share only fell 0.8 percent to close at 11.56 yuan. The Industrial and Commercial bank of China plunged 4.02 percent to close at 7.64 yuan as its H share rose 0.89 percent to close at 6.8 yuan.

The Shenzhen Component Index also dropped 3.15 percent to close at 18681.35. The CSI 300 index slid 3.58 percent to close at 5615.75. Turnover on the Shanghai and Shenzhen bourses amounted to 194.22 billion yuan, and the total market capitalization was 27.3 trillion yuan.

"There are many types of share swaps, but no matter which one is picked, the price differential between A and H shares is expected to narrow," said Wu.

Analysts said the stock market also fell because of a technical correction, with the benchmark indicator having risen 8 percent since October 8.

In addition, editorials published recently in official securities newspapers warned of the risk in the soaring stock market, intensifying investor concerns of further government policies, analysts said.

Traders said the timetable of stock index futures is expected to be released by the government as early as next week. The China Securities Journal quoted China Securities Regulatory Commission Vice-Chairman Tu Guangshao yesterday as saying the preparation for stock index futures is "quite sufficient" and the conditions are "quite mature".

"The launch of stock index futures is expected to trigger price fluctuation in the short term, but will not change the upward trend," said Zhu Haibin, an analyst at Essence Securities.

"Recent government policies to soak up liquidity, such as raising banks' reserve ratio and the launch of special deposits, are also expected to bring liquidity pressure on the market," said Wu from TX Investment.

(China Daily October 19, 2007)