China shares end down on concerns over liquidity squeeze

("China Shares End Down On Concerns Over Liquidity Squeeze," published Wednesday at 0744 GMT, misstated the year of the index futures contract in the second to last paragraph. The correct version follows.)

SHANGHAI (Dow Jones)--China's shares ended lower Wednesday in the first trading day of 2012 because of concerns over a liquidity squeeze ahead of the Lunar New Year that falls later this month, with small firms and breweries leading the declines.

The benchmark Shanghai Composite Index, which tracks both A and B shares, ended down 1.4%, or 30.03 points, at 2169.39. The Shenzhen Composite Index fell 2.7%, or 22.93 points, to 843.72.

Analysts said they expect the market to consolidate with a likelihood of further losses in coming weeks because liquidity will be hit ahead of the Lunar New Year that begins Jan. 22, as banks scramble for cash before the holiday to meet strong customer demand and because of new share offerings planned by several firms.

"I don't think liquidity conditions would improve significantly before the Spring Festival even if the central bank cuts the reserve requirement ratio for banks again," said Zhang Lei, an analyst with Minsheng Securities.

In November, China announced its first cut in the reserve ratio for banks in nearly three years, signalling Beijing has shifted its policy priority to supporting economic growth and job creation from combating inflation. The market had been expecting another cut after official data released late last month showed net outflows of foreign exchange for the second straight month in November.

Concerns the securities regulator is unlikely to slow its review of fundraising plans added to the pressure on the market.

"Few new investors want to take part in the stock market as initial public offerings remain on a fast track, which would drain massive funds from the market," said Shenyin Wanguo Securities analyst Qian Qimin.

The China Securities Regulatory Commission is scheduled to review the IPO applications of 12 companies this week, up from nine last week.

Small companies posted some of Wednesday's biggest declines due to concerns over earnings growth as the domestic economy slows, said analysts.

The SME Price Index, a subindex of the Shenzhen Stock Exchange that gauges the performance of small- and medium-sized firms listed on the board, closed down 2.7%.

Breweries were also weakened because of profit-taking, after they had risen due to window dressing by institutional investors at the year-end.

Shanxi Xinghuacun Fen Wine Factory fell 8.5% to CNY57.79 after rising 6.1% on Dec. 30, the last trading day of 2011, while Anhui Gujing Distillery slid 7.8% to CNY79.31 after gaining 3.6% and Wuliangye Yibin dropped 4.4% to CNY31.36 after adding 1.3%.

The January 2012 index futures contract, the most actively traded of the four index futures contracts traded in China, ended down 2.0% at 2305.6.

The futures are referenced to the CSI-300, an index of 300 Shanghai- and Shenzhen-listed yuan-denominated A shares. The CSI-300 ended 2.0% lower at 2298.75.