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China Stocks Fall, Yuan Weakens as Central Bank Holds Loan Rate

China Stocks Fall, Yuan Weakens as Central Bank Holds Loan Rate

(Bloomberg) -- China’s restrained approach to easing spooked financial markets Tuesday, with stocks and the yuan dropping the most in weeks.

The Shanghai Composite Index retreated 1.7%, its biggest decline in more than two months, to close below the psychologically important 3,000 level. The onshore yuan fell 0.37%, the most in three weeks, to 7.0950 a dollar as of 5:23 p.m. in Shanghai. The yield on China’s 10-year government bonds rose for a sixth day. In Hong Kong, the Hang Seng Index lost 1.2%.

China’s central bank drained funds from the financial system and kept the one-year rate on medium-term loans steady on Tuesday morning, a move analysts said shows it’s sticking with its prudent approach to stimulus. That’s even after data Monday signaled the economy slowed in August, with industrial output, retail sales and fixed-asset investment rising less than anticipated.

“Investors now realize the central bank won’t ease its monetary policy as aggressively,” Zhang Gang, a strategist with Central China Securities Co. “The market was due for a pullback after the Shanghai index climbed above 3,000 point level. Turnover failed to keep up.”

China Stocks Fall, Yuan Weakens as Central Bank Holds Loan Rate

Tuesday’s losses break the calm that had returned to the country’s stocks, bonds and currency markets in recent weeks, helped by the expectation China wouldn’t allow anything to overshadow its National Day on Oct. 1. A thaw in the trade war had also helped boost sentiment.

The move from the People’s Bank of China comes after its cuts to banks’ reserve ratios came into effect this week, adding an expected 800 billion yuan ($113 billion) in liquidity to the financial system. The Federal Reserve is widely expected to lower interest rates at its policy meeting this week.

Stock turnover has dropped since early September, when the Shanghai Composite Index tested the key 3,000-point level intraday for the first time in two months. It was about 26% lower than this month’s high on Tuesday.

--With assistance from Ken Wang.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, ;Sofia Horta e Costa at shortaecosta@bloomberg.net, Philip Glamann

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With assistance from Bloomberg