Shanghai stocks fall as economy, liquidity concerns resurface

SHANGHAI, Nov 2 (Reuters) – Shanghai stocks weakened on Thursday, dragged by industry and material shares, as worries resurfaced over a possible economic slowdown and tighter liquidity before year-end.

The blue-chip CSI300 index was unchanged at 3,997.13 points, while the Shanghai Composite Index closed down 0.4 percent to 3,383.31 points.

The tech-heavy start-up board ChiNext dropped 1.3 percent to a one-month low, having sunk 5.8 percent this year.

China’s mutual funds continued to cut their holdings in start-ups in the third quarter, consistent with ChiNext’s significant underperformance compared with large caps since 2016, Gao Ting, Head of China Strategy at UBS Securities wrote in a report.

Low risk appetite, tight market liquidity, and ChiNext’s slowing earnings growth are the main reasons behind this, Gao wrote.

With China’s generally upbeat third-quarter earnings in the rear-view mirror, investors are braced for a possible cooling in the economy as they weigh the impact of the government’s tough anti-corruption campaign and continuing deleveraging efforts.

The rapid rise in bond yields since mid-October “is the result of a sudden change in expectations toward the economy, and fresh assessment of the government’s determination to deleverage,” wrote Qiao Yongyuan, Shanghai-based strategist at CIB Research.

In the stock market, the impact of rising yields “is being gradually felt,” he said.

But a correction in China’s A-shares could be seen as a bargain-hunting opportunity for some overseas investors.

Foreign holdings of Chinese shares exceeded 1 trillion yuan ($151.49 billion) for the first time in September, central bank data showed on Thursday, as capital market deregulation and MSCI’s China inclusion fuelled demand for Chinese blue chips.

Sector performance was mixed, with industry and material firms leading the decline.

But consumer and health care firms bucked the trend, as investors sought shelter in those defensive plays. ($1 = 6.6011 Chinese yuan) (Reporting by Luoyan Liu and John Ruwitch; Editing by Jacqueline Wong)

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