China Stocks Slump Most in Four Months After Party Centenary

(Bloomberg) -- Chinese equities slid the most since early March as investors rushed to offload shares, with a perceived period of safety seen ending after the ruling Communist Party's 100th anniversary celebrations.

The CSI 300 Index finished the session 2.8% lower. Liquor giant Kweichow Moutai Co. and China Merchants Bank Co. were among the top drags on the benchmark. Foreign investors are also dumping mainland shares via trading links in Hong Kong, with net outflows hitting 8.6 billion yuan ($1.3 billion), the most since September.

“There were some funds betting on a safety window and stability in the market leading up to the centennial,” said Hua Tong, a fund manager at Shenzhen Zhengyuan Investment Co. “Now that the event has passed, they are retreating without that perceived layer of safety.”

The CSI 300 gained nearly 3% over the 11 sessions through Thursday, led by information technology and health-care stocks. With the slump on Friday, the index closed just below its 200-day moving average. The tech-heavy ChiNext plunged 3.5% while Hong Kong's Hang Seng Index fell as much as 2%, led by tech giants such as Alibaba Group Holding Ltd.

Authorities were targeting financial stability before Thursday's ceremony and amid the tightening interbank funding environment at the end of the second quarter. The People's Bank of China last week increased its short-term cash injection for the first time since March to soothe liquidity concerns. But it scaled back the additions as soon as the new quarter began, leading to net drainage of funds from the financial system.

“Investors went into the centenary yesterday with high expectations and market performance somewhat disappointed,” said Amy Lin, an analyst at Capital Securities. “Many turned sellers today. PBOC's net withdrawal of liquidity didn't help.”

However, the sharp drop could be short lived, some analysts say, given that China's economic growth has been stable while foreign markets are recovering, boding well for corporate earnings.

“Stocks will soon get back on course and there will be long-term outperformance in high-tech and growth sectors,” Shenzhen Zhengyuan's Hua said.

With assistance from Bloomberg