SHANGHAI - Stocks on the Chinese mainland fell for a second day, on concern that China's central bank may raise interest rates to tame inflation and tighten liquidity.

A gauge of small companies slid to the lowest in a month.

Yanzhou Coal Mining Co led declines for coal producers as oil prices slumped.

"There's an 80 percent chance that the central bank will increase interest rates in April and some investors are pulling their money out from stocks," said Richard Chen, a strategist at Jianghai Securities Co. "With the concerns about rate increases, the market outlook isn't optimistic for the coming two weeks."

The Shanghai Composite Index dropped 0.08 percent to 2955.77 at the 3 pm close on Wednesday. The CSI 300 Index lost 0.06 percent to 3256.08.

The central bank may increase rates once or twice in the second quarter, Bank of China Ltd economists said in a report on Wednesday on the nation's economic outlook.

Inflation may peak at 5.5 percent in March, moderate and then peak again at 5.5 to 6 percent in June, Ting Lu, economist at Bank of America Merrill Lynch, said in a report on Wednesday. The inflation data for March is scheduled to be released on April 15.

The seven-day repurchase rate, which measures interbank funding availability, surged 44 basis points to 2.57 percent, the biggest increase since March 21, according to a weighted average rate compiled by the National Interbank Funding Center.

Small companies dropped on concern shares are expensive given the prospect that obtaining loans will be more difficult this year.

Domestic banks offered 1.58 trillion yuan of new loans in the first two months of this year, 25 percent less than the same period a year earlier, according to the central bank.

"With some of the smaller cap stocks, you have to consider liquidity," Gary Motyl, chief investment officer at Templeton, part of Franklin Templeton Investments, said in an interview last month. "We tend to go with the large, more liquid names and we think, in the long term, they are fine."

Jiangsu Guotai International Group Guomao Co retreated 8.29 percent to 26 yuan ($3.96). Tsinghua Tongfang Co led technology companies lower, falling 2.5 percent to 25.74 yuan. Harbin Pharmaceutical Group Co extended losses to a third day, sliding 0.62 percent to 19.26 yuan.

A gauge tracking property developers in the Shanghai Composite Index sank 1.4 percent, the most among five industry groups. Poly Real Estate Group Co retreated 2.79 percent to 13.60 yuan.

A gauge tracking energy producers in the CSI 300 retreated 0.6 percent. Yanzhou Coal fell 1.05 percent to 34.94 yuan.

China Shipping Container Lines Co lost 3.04 percent to 4.46 yuan. China Shipping Container had its forecast for the year cut by 26 percent to 0.25 yuan and by 12 percent to 0.30 yuan for 2012 because of high fuel prices, Zhou Meng and Zhang Xilin, analysts at Shenyin & Wanguo Securities Co, wrote in a report on Wednesday.

Hong Kong stocks rose on Wednesday, sending the Hang Seng Index to its highest level in three weeks, as companies from Hutchison Whampoa Ltd and Cheung Kong (Holdings) Ltd reported full-year profits that exceeded analyst estimates.

The Hang Seng Index rose 1.70 percent to 23451.43, its highest close since March 10. The Hang Seng China Enterprises Index of mainland companies' H shares increased 1.87 percent to 13162.

Bloomberg News

(China Daily 03/31/2011 page17)