Chinese Stocks Retreat as Investors Assess Financial Crackdown

(Bloomberg) -- Chinese shares fell for a second day, led by utilities and materials shares, as investors assessed how the government will further address risks to the financial system.

The Shanghai Composite Index slipped 0.3 percent to 3,135.35 at the close. Shanghai Electric Power Co. led declines by electricity companies, while Hesteel Co. slid 6.9 percent and Aluminum Corporation of China Ltd. fell to its lowest since Jan. 13. The ChiNext gauge of small-cap companies lost 0.6 percent. Hong Kong's stock market was closed for a second time this week due to a holiday.

China's regulators have stepped up a campaign over the past month to clean up the financial system. That drive caused Shanghai's benchmark to fall 2.1 percent in April, the most of any month this year. On Wednesday, the Financial News, a People's Bank of China publication, said on its front page that investors shouldn't overreact to stronger regulation as it will spur healthy market growth in the long term. Separately, manufacturing gauges fell in April, signaling headwinds for an economy that accelerated in the past two quarters.

“Sentiment is weak given the downward pressure on the economy and possible risk of tougher regulation,” said Shen Zhengyang, a strategist at Northeast Securities Co. in Shanghai. “The market may be range-bound for a week or two.”

Investors have been loading up companies with earnings that are less reliant on economic growth, and ditching banks and oil producers. Gauges of consumer staples and health-care shares have surged to the highest levels relative to the CSI 300 Index since at least 2013 in recent days, while a measure of financial companies is near the lowest since November 2015.

The index of consumer shares rose 0.5 percent on Wednesday, the most among the CSI 300's 10 sub-gauges. Luzhou Laojiao Co. rose 1.4 percent, extending its gains in 2017 to 39 percent. Kweichow Moutai Co. added 1.3 percent, bringing its year-to-date advance to 25 percent.

• A measure of CSI 300 utility shares dropped 1.3%. Shanghai Electric Power retreated 1.9% to its lowest price since March 29. Zhejiang Zheneng Electric Power Co. lost 1.1% to its lowest since Dec. 20.
• Hesteel fell the most since April 20 to pace a measure of materials shares lower. Aluminum Corp. of China slipped more than 3% for a second day.
• Pang Da Automobile Trade Co. tumbled by the 10% daily limit. The company is under investigation by the China Securities Regulatory Commission for suspected violations of securities rules, according to a statement to the stock exchange.
• Guangdong Golden Dragon Development Inc. also dropped by the daily limit to its lowest close since Nov. 9. Dongguan Securities Co., in which Golden Dragon has a stake, received a notice from the regulator saying it will suspend a review of the brokerage's planned listing, Golden Dragon said in a statement on Tuesday after trading ended.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net.

To contact the editors responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net, Philip Glamann, Ron Harui

With assistance from Amanda Wang