China’s Stock Benchmark Falls Back to Key 5,000 Support Level

China’s equity benchmark edged back toward its 2021 low, briefly piercing through a key support level as traders sold everything from electronic cigarette stocks to raw-materials firms amid broader concerns over earnings and valuations.

The CSI 300 Index fell 1% to close at 5,009.25 points, extending its decline from this year’s peak to nearly 14% just days after the benchmark notched its longest weekly losing streak since early 2016.

The gauge pared losses near the close after dipping under the 5,000 point support level, a threshold it last settled below a day after the market fell into a technical correction. Foreign investors sold a net $1.1 billion worth of mainland stocks through trading links, the most since March 8. Traders said they were concerned about earnings growth not living up to the expectations that drove a buying frenzy before the Lunar New Year break.

China’s Stock Benchmark Falls Back to Key 5,000 Support Level

Credit Suisse Group AG analysts added to the grim outlook after they downgraded Chinese stocks to underweight from market weight, citing slower earnings growth and expensive valuations. The brokerage had slashed its view on China to market weight just a month prior.

“China now looks expensive on a number of metrics,” analysts including Dan Fineman and Kin Nang Chik write in a note. “China should suffer a bigger payback than most markets from temporary gains the pandemic delivered.”

The tumble for China’s once world-beating stock rally highlights just how quickly once-loved and favored sectors can fall from grace when regulators deem that the markets are running too hot. China’s securities regulator warned over the weekend about the risks of so-called “hot money” flows, or capital inflows fueled by the economy’s strong recovery and higher interest rates.

That kind of money could endanger the healthy development of markets and should be strictly controlled, said Yi Huiman, chairman of the China Securities Regulatory Commission.

Eve Energy Co., which makes lithium batteries used in e-cigar devices, tumbled 16%, the most on record. Draft measures issued late Monday by China’s Ministry of Industry and Information Technology that extends regulations for the e-cigarette sector sent related shares falling, including Hong Kong-listed Smoore International Holdings Ltd. and China Boton Group Co.which slumped by at least 23%.

Raw materials stocks including Lomon Billions Group Co. and Aluminum Corp of China Ltd. were among some of the biggest decliners in the CSI’s subgauge after aluminum futures prices dropped by the daily limit on speculation that China may release some of its state reserves.

Still, some analysts say the recent slide has upside. While the drive lower was on concern over more aggressive monetary and fiscal policy tightening, according to a BlackRock Investment Institute report, the weakness may offer an “attractive entry point”.

©2021 Bloomberg L.P.

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