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China Stocks Dive as Share Price of Massive IPO Soars


China's main stock index in Shanghai plunged five percent, even as the country's largest home builder soared in its market debut.

Investors in Shanghai scrambled to buy up shares of China State Construction Engineering Group (CSCEC). The company raised $7.3 billion during its initial public offering, the largest new offering in the world in 16 months.

Its share price ended the day at 6.53 yuan, or about or $1, up 56 percent from its initial price (of 4.18 yuan).

That was in sharp contrast with the overall index in Shanghai, which saw its steepest plunge in eight months, closing down five percent. Traders say investors were locking in profits, following several weeks of strong gains, because of concerns that share prices are rising too fast.

Last September, China halted IPOs after the Shanghai index tumbled 60 percent as the global financial crisis set in.

This year, the market has rebounded more than 80 percent, and last month, the government ended the IPO ban. On Monday, toll road operator Sichuan Expressway became the first new listing in Shanghai and its share price tripled.

City University of Hong Kong associate economics professor Charles Li says the government is using IPOs as part of its effort to control the economy.

"If the government says we have to get an eight percent growth rate or we want to get an eight percent growth rate then basically all you need is to make sure that it is eight percent," he explained. "The banks, the investors, SOE's [state-owned enterprises] whoever you have in mind, will work toward that goal. So, boosting the economy up is the order of the day."

Market analysts say the return of IPOs has triggered a buying craze. Increasingly, talk is turning toward the possibility of a market bubble in China.

Li says that if a bubble is building, the government is likely to ignore it as long as it helps reach the goal of keeping China's growth rate above eight percent. The government says that level will keep unemployment from rising.

Most other Asian stock markets closed lower, following modest declines in the U.S. and European markets Tuesday. Hong Kong's Hang Seng index lost more than two percent, and Taipei's main index shed eight-tenths of a percent. But Tokyo's Nikkei index gained a quarter of a percent.

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