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China stocks fall, yuan loses steam as central bank holds loan rate

Shanghai Composite Index falls 1.7%, its biggest decline in more than two months

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China's central bank drained funds from the financial system and kept the one-year rate on medium- term loans steady on Tuesday morning.

Shanghai

CHINA'S restrained approach to easing spooked financial markets on Tuesday, with stocks and the yuan dropping the most in weeks.

The Shanghai Composite Index retreated 1.7 per cent, its biggest decline in more than two months, to close below the psychologically important 3,000 level. The onshore yuan fell 0.34 per cent, the most in three weeks, to 7.0924 per dollar in Shanghai. The yield on China's 10-year government bonds rose for a sixth day. In Hong Kong, the Hang Seng Index lost 1.4 per cent.

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.

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That's even after data on Monday signalled the economy slowed in August, with industrial output, retail sales and fixed-asset investment rising less than anticipated.

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

Tuesday's losses broke 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 (PBOC) comes after its cuts to banks' reserve ratios came into effect this week, adding an expected 800 billion yuan (S$160 billion) in liquidity to the financial system.

The Federal Reserve is widely expected to lower interest rates at its policy meeting this week. BLOOMBERG