China Stock Traders Sell Favorites After Benchmark Tests Record

Mainland traders rushed to take profit from China’s equity market on Friday, selling key stocks a day after the main benchmark briefly surpassed its 2007 closing high.

The CSI 300 dropped 1.6% as of 10:58 a.m. local time while the liquidity-sensitive ChiNext gauge of small caps declined 3.4%, after the central bank drained short-term cash from the market. Mainland investors also hit the brakes in buying Hong Kong stocks, with net southbound flow poised to turn negative for the first time in 36 sessions.

A major contributor to the losses on the mainland was a decline of as much as 3.6% for Kweichow Moutai Co., the biggest-weighted stock on the equity benchmark. Elsewhere, Contemporary Amperex Technology Co. dropped as much as 5.7%. They are part of the so-called crowded favorites that led the march toward new highs for the CSI 300 Index in recent months. Materials and consumer discretionary stocks were among leading decliners Friday.

China Stock Traders Sell Favorites After Benchmark Tests Record

While there was no substantial negative sentiment, investors were paying close attention to the central bank’s moves on liquidity, said Liu Xiaodong, fund manager at Shanghai Power Asset Management Co.

“Despite everything the People’s Bank of China says, the stance is plain and clear that its going to run a tight ship and keep the market on a leash,” he said. “I’ve cut some exposure to health care stocks today, but I’m holding on to everything else because in this horizontally-moving market, there will still be outperformers.”

The CSI 300 is up 9% this year, with a valuation metric at the highest in nearly six years. While traders remain bullish about the equity market’s long-term prospects, driven by the pandemic recovery and strong corporate earnings, evidence of overcrowding in stocks like liquor makers have made some investors more cautious.

How China’s central bank balances support for an uneven economic recovery without fueling excessive speculation is a key driver of investor sentiment. Traders were rattled by January’s liquidity squeeze when the PBOC withdrew cash from the financial system for the first time in six months, but authorities have drip-fed funding since then.

In Hong Kong, the Hang Seng Index was down as much as 1.6% in morning trade. Mainland traders sold HK$128 million ($16.5 million) in southbound flow. In the past two months, they had net bought a combined HK$429 billion of the city’s shares, about two-thirds of last year’s total.

©2021 Bloomberg L.P.

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