(May 14)( SHANGHAI), - China stocks ended lower on Tuesday, while government bond yields inched up and the yuan strengthened the day after a strong earthquake in the southwestern province of Sichuan killed nearly 10,000.

Several brokerages said the earthquake may add to near-term inflationary pressures, which already weighed heavily on the market after Monday's announcement of a rise in consumer price inflation that prompted the central bank to raise banks' reserve ratios.

Sichuan is a key rice and pork producing area, and food prices have been the key driver of recent inflation to 12-year highs.

China's benchmark stock index .SSEC closed down 1.84 percent at 3,560.24 points after falling as much as 3.27 percent in early trade, hit partly by a slump in insurance shares.
"While the quake is an enormous human tragedy, we expect its impact on China's economic growth to be temporary and limited. Probably the largest macro impact is raising the upside risks to China's inflation outlook in the near term," Lehman Brothers said in a research note on Tuesday.

The government said annual consumer price inflation quickened to 8.5 percent in April from 8.3 percent in March, lingering near February's 12-year high of 8.7 percent and sparking worries of more monetary tightening, possibly including an interest rate rise in coming months.

The central bank announced after Monday's market close that it would raise banks' reserve requirement ratios by 0.5 percentage point, bringing the rate for large banks to a record 16.5 percent.

"Overall, the impact of the earthquake on the markets should be temporary, while the monetary tightening stance should have much longer-term consequences," said economist Jin Dehuan at Shanghai Securities and Futures Institute.

INSURERS HURT, BUILDERS RISE

The Shanghai and Shenzhen stock exchanges suspended trade in 66 shares of companies in the Sichuan area, the largest trading suspension in the bourses' 18-year history.

China Life Insurance (601628.SS: Quote, Profile, Research) finished 4.73 percent lower at 31.63 yuan. The country's largest life insurer said it expected compensation for the Sichuan earthquake would far exceed claims for severe snowstorms in southern China early this year that were the worst in decades.

But steel, pharmaceutical, cement and rice shares rose on expectations that rescue and reconstruction efforts would spur demand
Hebei Taihang Cement (600553.SS: Quote, Profile, Research), Tuesday's biggest gainer, jumped its 10 percent daily limit to 6.33 yuan.

Despite the broader market fall, "the market should have limited potential for a sharp drop as government policy is to maintain market stability ahead of the summer Olympic Games," said senior stock analyst Zheng Weigang at Shanghai Securities.

Zheng and several other analysts forecast the benchmark index would hover around 3,500 points in coming weeks.

In the government bond market, the indicative five-year government bond yield  edged up 0.1 basis point to its highest level since the start of April.

The weighted average rate of seven-day bond repurchase agreements ,the barometer of China's short-term liquidity, rose 9 basis points to 3.2951 percent.

"The market is worried about further monetary tightening, such as a possible interest rate hike," said analyst Dong Dezhi at Bank of China. "But bond yields have already risen since mid-April and that will help to limit the impact of such fears."

The yuan rose to 6.9860 against the dollar in late trade after having fallen as low as 6.9949, compared with Monday's close of 6.9882.

The People's Bank of China, which typically moves to keep the yuan stable immediately after a monetary tightening, set a slightly lower reference rate on Tuesday.

But expectations the government would continue to use yuan appreciation in the medium term as a tool to battle inflation spurred a turnaround in the market, dealers said.

Several dealers maintained their forecasts for the yuan to rise 8.5 to 10 percent for all of 2008, as China relies on the yuan's exchange rate as one of its weapons to fight inflation.

(Editor: Jia Fu)