China stocks drop 1.9 pct as Ping An falls back

China's stock market fell on Friday as shares in Ping An Insurance tumbled, almost erasing the big gain which they posted on Thursday after shareholders approved the company's plan for a $17 billion equity issue.

The Shanghai Composite Index <.SSEC> ended the morning down 1.85 percent at 4,280.318 points, within a whisker of its low of 4,279.112.

Losing stocks in Shanghai outnumbered gainers by 756 to 145, while turnover in Shanghai A shares shrank to a moderate 54.1 billion yuan ($7.6 billion) from Thursday morning's 83.0 billion.

Ping An <601318.ss>, which had jumped 7.87 percent on Thursday, was 6.67 percent lower at 67.55 yuan in heavy trade. It has dropped from 98 yuan since its fund-raising plan was announced in mid-January.

Many fund managers and analysts were surprised by Thursday's leap, since they are worried about the market's ability to absorb large cash calls and Ping An has not explained in any detail how it will use the money.

Some speculated that Thursday's rise was caused by purchases of the shares by corporate allies of Ping An, or conceivably by companies buying at the behest of the government in an effort to support the market. Friday's pull-back appeared to confirm that the stock was not starting an extended recovery.

"Ping An failed to rise its 10 percent daily limit on Thursday even though trade in it was so heavy. This suggested institutions are still interested in selling the stock -- I cannot see any attraction in it right now," said Chen Huiqin, analyst at Huatai Securities.

"Selling pressure on Ping An will be heavy in the next couple of months as more than 400 million shares were voted against its fund-raising plan at the shareholders meeting, and they are very likely to be sold," said Wang Xiaogang, insurance industry analyst at Orient Securities.

He said Ping An shares had the potential to fall below 60 yuan in coming weeks, though in the long term they would rebound sharply if the company used part of the money raised to acquire good assets.

Chen and others said large cap stocks were likely to continue consolidating for some time, partly because of worries that big companies could follow Ping An's lead in making cash calls.

Another concern for the market is next Tuesday's release of consumer price inflation for February. A strong market rumour says the rate will come in at a fresh 11-year high of 8.1 percent, up from January's 7.1 percent.

Analysts see a good chance of an interest rate hike soon after such a number, though the bond market thinks it would be the last hike this year and still expects some degree of monetary easing later this year.

Among other falling stocks on Friday, Mudanjiang Hengfeng Paper <600356.ss> tumbled 8.46 percent to 13.95 yuan after saying its 2007 net profit fell 6 percent.

Textile firm Ningbo Veken Elite Group <600152.ss> slipped 7.43 percent to 9.97 yuan after denying local media reports that it planned to build a factory to make solar energy cells.

Among gainers, many Shanghai-based firms were strong after the city's mayor Han Zheng said late on Thursday that Shanghai had applied to the Chinese central government to build its own Disneyland.

Property firm Shanghai Shimao <600823.ss> surged 6.25 percent to 19.72 yuan, although it remains unclear whether the city will win central government approval and reach an agreement with Walt Disney Co , and whether Shanghai Shimao would benefit.

($1 = 7.10 yuan)