Small cap plunge drags China stocks lower despite strong GDP growth

SHANGHAI, July 17 (Reuters) – Sharp drops in highly
speculative small-cap stocks pulled China’s major stock indexes
lower on Monday, offsetting stronger-than-expected economic
growth data.

Fears of further policy tightening and a flood of supply
from initial public offerings pulled benchmarks down by an
unusually hefty 2 percent in early trade.

They briefly recouped the losses after data showed the
economy expanded 6.9 percent in the second quarter, defying
expectations for a slight loss of momentum.

But selling intensified again in the afternoon, with the
blue-chip CSI300 index ending down 1.1 percent at
3,663.56 points, while the Shanghai Composite Index slid
1.4 percent to 3,176.46.

The tech-heavy start-up board ChiNext tumbled
5.1 percent to a 2-1/2 year low, posting its worst day in 2017.

“The game of story-telling in ChiNext is over,” said Shen
Weizheng, fund manager at Ivy Capital.

Nearly 500 stocks, most of them small firms, plunged the 10
percent trading limit, a rare scene this year as the authorities
attached great importance to maintaining stability in the stock
market.

In contrast to larger, state-owned firms, including major
banks, which are being buoyed most by the strong economy, an
increasing number of once-high-flying start-ups are floundering
– a trend epitomized by Leshi Internet & Information Corp
, which unveiled over the weekend it swung to a loss
in the first half.

Investors also attribute stocks’ diverging fortunes to
policy messages from the fifth National Financial Work
Conference held over the weekend, in which President Xi Jinping
vowed to strengthen the Communist Party’s leadership in the
financial sector.

Interpreting the conference, China Merchant Securities said
in report that “the high-valuation bubble is bursting” as the
pace of initial public offerings will accelerate.

Most sectors lost ground, led by real estate
and industry shares, while gains in bank stocks
, favoured for their improved profitability and low
valuations, failed to lift sentiment.
(Reporting by Luoyan Liu and John Ruwitch; Editing by Kim
Coghill)

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