Small cap plunge drags China stocks lower despite strong GDP growth

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SHANGHAI (July 17): 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% in early trade.

They briefly recouped the losses after data showed the economy expanded 6.9% 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% at 3,663.56 points, while the Shanghai Composite Index slid 1.4% to 3,176.46.

The tech-heavy start-up board ChiNext tumbled 5.1% to a 2½-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% 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.