SHANGHAI stocks retreated yesterday following a report that China's manufacturing activity may have slowed for a fourth straight month in July to the lowest in 11 months, while fears over a liquidity crunch were reignited after lending rates in the interbank market rose for a sixth straight day.

A wide sell-off in heavily weighted stocks dragged the market down, with the key Shanghai Composite Index ending 0.52 percent lower to settle at 2,033.33 points.

The market pared a loss of as much as 1.6 percent in early trading thanks to a bout of rebound in small-cap shares of media companies, environment-protection firms and IT enterprises.

HSBC's Flash China Purchasing Managers' Index, the earliest indicator of the country's manufacturing activity slanted more toward private and export-oriented firms, fell in July to 47.7, down from the final reading of 48.2 in June, HSBC Holdings PLC announced yesterday.

A reading of 50 or higher generally indicates expansion. The reading plunged for the fourth month in a row and was the lowest in 11 months, fueling concern over China's economic malaise

"The decline in PMI indicated China's economy remained in a downward trajectory in the third quarter with falling production and new orders pointing to deteriorating demand," said Fan Guilong, a Huarong Securities analyst.

Interbank borrowing

The market decline also came amid a continuous rise in interbank borrowing costs, with the seven-day repurchase rate, an indicator of liquidity strain among banks, advancing 5.2 basis points to 4.01 percent, the sixth consecutive gain.

Lenders were the biggest dampeners yesterday amid concern over a glut of shares after China Merchants Bank, the country's sixth-largest lender by assets, said it has received approval from the China Securities Regulatory Commission to raise 35 billion yuan (US$5.7 billion) through a rights issue in Shanghai and Hong Kong.

China Merchants Bank fell 1.4 percent to 10.90 yuan. China Minsheng Banking Corp dropped 2 percent to 8.47 yuan. Industrial Bank Co decreased 2.6 percent to close at 9.39 yuan.