The Shanghai Composite Index fell by 8.3% to close at 3,670 points, on speculation that the Chinese government could launch a new wave of tightening measures to cool down one of the hottest stock markets in the world. This was the lowest close since April and the market biggest decline since February 27 when the market fell by nearly 10 percent. Half of the index components went “limit down” by the mandated 10 percent including companies like China’s largest electricity producer Huaneng Power International which fell 19 percent and China Air which lost 1.07 Yuan. Last week, China’s Ministry of Finance stunned the markets by announcing a rise on stamp tax on securities trading to three yuan per thousand yuan of share values and in the last two decades, an increase in stamp duties, has always caused a plunge in the stock market. Still, other major Asian markets ended the day higher and both European and American markets were relatively stable on Monday.

Growth rate of the Chinese manufacturing sector reached its highest level in more than two years. CLSA China Purchasing Managers’ Index peaked at 54.1 in May, its highest level since April 2005 and up from 53.3 in April. The increase in the PMI can be attributed to increased bank lending, accelerated growth rate of output, rise in employment and new orders, as well as improved delivery times of suppliers. For the eighteenth consecutive month, output production was boosted, yet backlogs in production rose at the steepest rate in the past 20 months. The production data is indicative of economic strength, especially in the occurrence of demand dampening factors such as the eight-month high reached by input price inflation due to rising oil and steel prices. More than 12 percent of manufacturers registered a rise in export prices, hence suggesting the conclusion that that the global economy is not at the risk of exporting as much disinflation from China as in the past. The economic outlook is widely anticipated to spur the Chinese government into imposing a tighter monetary policy in order to prevent the economy from overheating.

The Hong Kong dollar appreciated against the U.S. dollar upon the release of data showing strong growth in the Hong Kong housing sector. The total consideration of sale and purchase of all types of building units rose by 3.1 percent on a month-on-month basis, and recorded a 35 percent increase on a yearly basis. On other front, the Chinese yuan weakened against the buck as speculation of further tightening of the monetary policy by the Chinese government pressed the Shanghai Composite Index down by 8.3 percent.There were no relevant economic releases today for Singapore and the SGD traded in a very tight range.

Antonio Sousa is a Currency Analyst for FXCM.