China's stock markets are jittery, and they face potential adjustments in the year's second half, amid uncertainties surrounding pending policy changes.

Rumous that the government was reviving plans to sell State-owned shares and that the People's Bank of China, the nation's central bank, would clamp down on banks' loans have sent China's yuan-denominated A-share markets into a funk.

From July 18, the benchmark Shanghai Composite Index had lost more than 60 points, and the markets watched as more than 25 billion yuan (US$3.02 billion) evaporated.

"The market, right now, cannot afford any more bad news," said Liu Jingde, a senior market analyst with Beijing Securities Co's research centre.

"The policies, both from the government and the central bank, will be key in determining market moves throughout the remainder of this year."

Chinese media reported in July that the government was ready to announce, most likely in August, it will resume selling State-held shares.

The markets shuddered at the news, and plunged 2.5 per cent.

But the State-owned Assets Supervision and Administration Commission (SASAC) refuted those reports.

SASAC officials said the reports were "unfounded," and there was "no definite timetable" for the sell-down of State-held chares.

The markets, however, did not welcome SASAC's response, and continued to slide.

Experts suggest other uncertainties remain, and that investors' confidence had been severely undermined by the false media reports.

"The reports refreshed investors' memories of the market tumble two years ago, when the government first announced it would float non-tradable State holdings," Liu said.

"Although the plan was shelved, the share sale will come sooner or later, as the government needs the money to pay for social welfare programmes."

The biggest sale under the plan, 11.8 billion shares in Sinopec, Asia's largest refiner, sheared the value of State-held shares and caused markets to plunge 40 per cent within four months.

Investors' concerns over the central bank's monetary policy has contributed to the recent market slump, experts suggested.

PBOC officials are widely expected to raise the renminbi's interest rate soon to contain surging inflation.

The measure, combined with the bank's recently announced restrictions on mortgages, is expected to reduce overall money supply.

China's money supply, which included cash and deposits, was up a stunning 20.8 per cent at the end of June compared with a year ago. That marked the fastest annual growth rate in more than five years.

"Tightening up the money supply will inevitably push up costs of raising funds, and therefore will influence the volume of funds being channelled into the stock markets," Liu said.

"The market will most likely fluctuate throughout the year's second half, if the government does not issue positive policies."

The authorities' decision to closely monitor all securities accounts, to crack down on money laundering, will also affect the stock market in the next few months, experts suggest.

Earlier this year, PBOC officials issued a mandate to take effect in September, that investors can only channel their money to the stock market through bank accounts which are in their names.

The mandate might block privately raised funds, often disguised in hundreds of individual accounts, from entering the stock market, experts predict.

"PBOC's mandate has so far had the most negative effect on the market," said Wang Kai, a senior analyst with Huaxia Securities Co's research centre.

"Although it has not yet been implemented, some funds, with irregularities, might fear the regulation.

"The impact of this on the market should not be underestimated," Wang added.

The central bank's hiking of the interest rate, if it happens, is not likely to influence the market as severely as some suggest.

PBOC since 1996 has lowered interest rates eight times.

"Just the reduction of the interest rate had little effect on the stock market. An increase will not likely have an opposite effect," Wang said.

Expansion of the stock markets, despite the strain on funds, will likely cause share prices to bottom out in the near future, experts suggest.

The schedule of Chinese firms' initial public offerings (IPOs) will remain unchanged over the next few months, sources said.

The Shenzhen Stock Exchange, after a three-year suspension of firms' IPOs, is reportedly going to resume listing new companies later this year.

"These will further weigh on the currently weak market," said Huang Qiang, an analyst with Everbright Securities Co.

China Southern Airlines Co, the country's largest air carrier, listed on July 25, while the Shanghai Composite Index was down 15.8 points.

Transactions of the company's more than 1 billion shares accounted for almost half of the deals that day in the Shanghai market.

Issuance of listed firms' mid-year reports will also affect investors' decisions, experts suggest.

Although the reports, issued in July, painted a bright picture, investors who were concerned about the post-SARS effects speculated there will likely be more bad news.

"In China, companies with good profits usually release their financial reports first, while others report their losses later, in August or September," Wang said.

SASAC, thought to be ruling out the possibility of share sales in the near future, acknowledged it is drafting a provisional regulation regarding the transfer of State-held shares in listed companies.

The regulation will be dealt with during this year's legislative schedule, SASAC said.

Speculation in June last year that the government might resume its plan to sell State-held shares caused the market to tumble 15 per cent.

The government eventually postponed the programme indefinitely.

Shang Fulin, head of the China Securities Regulatory Commission, reiterated earlier this year the stock market should help stabilize the nation's economy.

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