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Crackdown risk has China's hottest stocks looking vulnerable

[HONG KONG] Chinese commodity shares, the best performing part of the market, are turning increasingly volatile as warnings grow over possible government steps to cool surging raw material prices.

Thirty-day price swings on a gauge of commodity producers climbed to the highest since April 2016 as the measure tumbled as much as 2.4 per cent Wednesday in otherwise dull trading for China's stock market. A steel association warned that prices won't climb forever, while another group suggested that the government sell some of its rare earth reserves to stabilise prices.

The index of 27 materials companies has surged 13 per cent in the second half of the year, five times the pace of the CSI 300 Index, as prices of everything from iron ore futures to eggs climbed. It's not just stocks - China's so-called old-economy companies are also enjoying increased favour in the debt market, with coal as well as iron and steel bonds climbing.

"Selling pressure on commodity shares could increase should there be strong controls from policy makers," Wanlian Securities Co analyst Hu Hongwei wrote in a note dated Wednesday. "Investors are advised to stay away from commodity shares until the policy uncertainty is removed."

Any government intervention risks blighting one of the few bright spots in a stock market that's struggled in the wake of 2015's US$5 trillion bust. The materials index hit a two-year high earlier this month before tumbling amid a global selloff. Yet regulators have previously been reluctant to allow speculative frenzies to persist - stepping in, for instance, in a previous boom last year.

Jinduicheng Molybdenum Co and China Northern Rare Earth Group High-Tech Co were the biggest losers on Wednesday, falling at least 5 per cent. Baoshan Iron & Steel Co and Aluminum Corp of China Ltd, known as Chalco, also tumbled. The gauge slipped 0.1 per cent on Thursday.