Strong China GDP pulls stocks from the red but small caps recoil, HK gains

* SSEC -0.1 pct, CSI300 +0.2 pct, HSI +0.6 pct

* ChiNext tumbles to 2-1/2-year lows on supply, earnings
concern

* State firms benefit most from better-than-expected GDP
growth

SHANGHAI, July 17 (Reuters) – China’s major stock indexes
recouped sharp early losses on Monday as robust economic growth
data buoyed earnings prospects for blue chips, prompting
investors to dump highly speculative small caps.

Fears of further policy tightening and a flood of supply
from initial public offerings also added to the gloomy mood in
early trading, though sentiment improved after data showed the
economy expanded 6.9 percent in the second quarter, slightly
faster than expected.

Growth in June industrial output and retail sales also came
in stronger than expected.

China’s blue-chip CSI300 index rose 0.2 percent to
3,711.16 points by the end of the morning session, while the
Shanghai Composite Index was roughly flat at 3,218.75.
Both had been down more than 2 percent in early trade.

However, the start-up board ChiNext tumbled as
much as 5.3 percent to a 2-1/2 year low, before recouping some
losses. The gauge ended the morning down 3.4 percent.

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

“You need to buy blue-chips with good earnings.”

Chinese investors dropped small-cap stocks after President
Xi Jinping vowed over the weekend to strengthen financial
supervision and expand direct financing, which will potentially
boost equity supply.

In contrast to larger, state-owned firms 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 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.

“Listed firms with good business performance will continue
to be chased by investors … while ChiNext will continue to
find its bottom,” the brokerage said, forecasting average
earnings of ChiNext companies will fall to “single-digit” growth
from an expected 25 percent this year.

The SSE50 Index, dubbed China’s “Nifty Fifty”,
continued to climb, rising 1.5 percent to the highest level in
almost two years.

HONG KONG

Hong Kong shares were on track to rise for the sixth
straight session, amid signs Chinese investors are accelerating
investments into the city.

The Hang Seng index added 0.6 percent to 26,542.00,
while the Hong Kong China Enterprises Index gained 1.1
percent to 10,846.36.

Last week, nearly 9 billion yuan ($1.33 billion) worth of
Chinese money flowed into Hong Kong stocks, with buying
concentrated in the financial sector, the China Securities
Journal reported on Monday.
($1 = 6.7687 Chinese yuan renminbi)

(Reporting by Samuel Shen and John Ruwitch; Editing by Kim
Coghill)

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