China's Stocks Slump Amid Regulatory Concern; Small Caps Plunge

Jul 17, 2017 10:40 pm ET

(Bloomberg) -- China’s stocks slumped, led by small-cap shares, amid concern that the outcomes of a closed-door conference on regulation over the weekend may be tougher rules and more initial public offerings.

The Shanghai Composite Index fell as much as 2.6 percent, its biggest loss since December, before paring declines to 1.1 percent at 10:24 a.m. The ChiNext gauge of mostly technology companies sank 3 percent, poised for its lowest close since January 2015.

Chinese President Xi Jinping said the central bank will play a stronger role in defending against risks, calling for more work on safeguarding the financial system and modernizing its regulatory framework. The regulator approved nine IPOs for a second week in a row on Friday. Data Monday showed the nation’s economy grew a better-than-expected 6.9 percent in the second quarter from a year earlier.

The weekend meeting has boosted concerns the government may tighten rules in the financial market, which is worrying investors, said Zhang Gang, Shanghai-based strategist at Central China Securities Holdings. "People are rushing to cut risks. Chinext companies got hurt most from such risk-off sentiment, as many ChiNext firms are highly leveraged."

Attendees at the conference discussed the need to increase direct financing, which may signal an increase in the number of initial share sale approvals, said Dai Ming, a Shanghai-based fund manager at Hengsheng Asset Management Co. China’s securities regulator keeps a tight leash on IPOs, with controls on the number and timing of deals creating a backlog of companies waiting for a listing.

"The conference shows regulations are unlikely to ease," Dai said. "The pace of IPOs have already picked up. So the market is worried if IPOs increase, then demand and supply in the market will be imbalanced briefly."

Offshore Chinese stocks were immune to the selling, with a gauge of H shares rising 0.7 percent in Hong Kong.

©2017 Bloomberg L.P.