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China small-cap shares sink to 2015 low amid regulatory concern

[HONG KONG] Chinese small-cap shares tumbled, leading the market lower, amid concerns about tougher regulations and more initial public offerings following a high-level conference over the weekend attended by President Xi Jinping.

The ChiNext gauge of mostly technology companies sank 5.1 per cent at the close to 1,656.43, the lowest level since January 2015. The Shanghai Composite Index dropped 1.4 per cent, the most since December.

President Xi said the central bank will play a stronger role in defending against risks, and called for more work on safeguarding the financial system and modernizing its regulatory framework. 

Strategists also interpreted discussion at the conference on the need to increase direct financing as a signal that officials may accelerate the approval of initial share sales, diverting investor cash from existing stocks.

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The weekend meeting has got investors worried about tighter rules in the financial market, 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."

A Xinhua News Agency statement said China should increase the proportion of direct financing in total credit.

China's securities watchdog 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 regulator approved nine IPOs for a second week in a row on Friday.

"The conference shows regulations are unlikely to ease," said Dai Ming, a Shanghai-based fund manager at Hengsheng Asset Management.

"The pace of IPOs has 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 largely immune to the selling, with a gauge of shares rising 0.5 per cent in Hong Kong as data showed China's economy grew a faster-than-expected 6.9 per cent in the second quarter from a year earlier. China Merchants Port Holdings climbed the most on the Hang Seng Index after saying it expects first-half profit to jump by more than 50 per cent. The benchmark Hang Seng Index gained 0.3 per cent.

Beijing Wandong Medical Technology Co. slid 7.5 per cent and Jiangsu Yuyue Medical Equipment & Supply tumbled by the 10 per cent daily limit in mainland trading after saying Chairman Wu Guangming is under investigation by the nation's securities regulator on suspicion of insider trading.

Hithink RoyalFlush Information Network slumped 10 per cent in Shenzhen after warning of a profit decline in the first half and saying that shareholders plan to reduce stakes.

Shenzhen Infogem Technologies dropped 10 per cent after saying its first-half net profit probably fell.

China Merchants Port jumped 5.1 per cent in Hong Kong. Zoomlion Heavy Industry Science and Technology gained two per cent after saying that it it expects to swing to a profit in the first half from a net loss a year earlier.

Macau gaming companies led losses on the Hang Seng Index, with Sands China and Galaxy Entertainment Group retreating at least 2.1 per cent.

Macau casino operators may come under pressure after one of the city's largest junket operators warned customers and key staff of "liquidity channel impairment, advised clients to withdraw money from affected bank accounts", Daiwa Capital Markets Hong Kong analyst Jamie Soo wrote in a note.