China Small Caps Crash To Lowest Since 2015 Amid Deleveraging "Selling Panic"

In practical terms, the conference 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. The announcement prompted the selloff in the small cap  ChiNext Index on worries that the government would further intensify its deleveraging campaign, according to Chinese analysts. Quoted by Bloomberg, Zhang Gang, Shanghai-based strategist at Central China Securities Holdings, said that the regulator’s weekend meeting “reflects that China may further tighten the financial market, which has worried investors,” 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.

Others echoed the sentiment: Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai said that Chinese shares are sliding because the government’s National Financial Work Conference showed regulations are likely to tighten. He added that "regulatory tightening concern prompted major shareholders to cut holdings quickly, triggering a selling panic."

As Bloomberg adds, 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. 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,” Dai added. “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.”

Especially hit in the overnight rout were stocks linked to internet finance which tumble on concerns authorities may crack down on the industry.  With the central bank vowing to play a stronger role in defending against risks, investors were concerned that "China may suspend development in some areas including Internet finance due to weak links in regulation so it can better contain financial risk", said Wang Chen, Shanghai-based fund manager with Xufunds Investment Management. As a result, Hithink RoyalFlush dropped by the 10% daily limit, leading sector decline (the company also warned of a profit decrease in 1H and holder’s plan to cut stake), while others slammed included Hundsun Technologies slides as much as 10%, Sinodata falls as much as 9.8% to lowest intraday price since January 2015, Shanghai DZH declines as much as 5%.

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