SHANGHAI stocks retreated yesterday amid diminishing hopes that the government will take aggressive measures to support economic growth, even though China reported a surprising surge in foreign direct investment last month.

The key Shanghai Composite Index shed 20.80 points, or 1.01 percent, to close at 2,044.92.

Market expectations for a policy spur were dampened by Finance Minister Lou Jiwei, who said China is unlikely to unveil a large fiscal stimulus this year but will instead offer some tax preferences for small businesses, according to a statement published on the ministry's website yesterday.

Premier Li Keqiang on Tuesday reiterated that China will keep stabilizing economic growth and controlling inflation risks while pushing forward reforms, but added it would not shift its policy direction because of a temporary change in economic indicators.

"Li's remarks indicated that the government is comfortable with the current pace of growth slowdown and will tolerate a similar pace of decline in the second half of the year," Zhang Zhiwei, chief economist for China at Nomura Holdings Inc, said in a note yesterday.

China's economy expanded 7.5 percent year on year in the second quarter, down from 7.7 percent in the first quarter and 7.9 percent in the fourth quarter last year.

Distilleries, automakers and oil producers were among the biggest losers.

Kweichow Moutai Co, a leading producer of high-end liquor, fell 2.1 percent to 186.92 yuan (US$30.46). Sichuan Tuopai Shede Wine Co slipped 4.3 percent to 17.44 yuan.

China attracted US$14.39 billion in FDI in June, a 20.12 percent increase from a year earlier, the Ministry of Commerce said yesterday. The figure compared to a 0.29 percent gain in May.

FDI totaled US$61.98 billion in the first six months of the year, up 4.9 percent year on year, the ministry said.