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China Stocks Drop Most in a Month on Covid Flareups, Tech Fines

(Bloomberg) -- Chinese stocks had their worst day in about a month as a Covid resurgence, combined with fresh fines for the country’s tech giants, sent investors running for the door.

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The Hang Seng China Enterprises Index, a gauge tracking mainland firms listed in Hong Kong, slumped 3.1%, its biggest loss since mid-June. Tech heavyweights, property developers and electric-vehicle makers were among the biggest drags.

A slew of bad news hit the Chinese market over the weekend and Monday morning, including regulatory fines on past transactions done by Alibaba Group Holding Ltd. and Tencent Holdings Ltd., a rejection by China Evergrande Group’s bondholders on a proposal to extend debt payment, and a warning by a prominent investor’s wife that a key lithium maker’s stock is overvalued.

The selloff is a reminder that the nation’s Covid Zero policy and lingering uncertainty toward tech crackdowns remain key risks for investors betting on a sustained rebound in Chinese shares. The Hang Seng China gauge has recorded just one positive session in the last eight after rallying nearly 30% from a March low.

“There is a strong demand for consolidation or giving up some of the gains this far into the rebound and earnings are providing an excuse to sell for some sectors,” Zhang Jingzhong, director at MX Capital Co. Ltd., said.

Onshore, the world-beating surge for the benchmark CSI 300 Index is also unwinding, with the measure sliding 1.7% after ending a five-week winning streak. Green-linked stocks were among the worst performers. Tianqi Lithium Corp. plunged by nearly 10% after Ying Ying, wife of once-influential fund manager Xu Xiang, said the lithium producer had reached peak valuations and earnings growth in a social media post over the weekend.

Investors are getting nervous as the start of the earnings season gives them access to hard data on the impact of lockdowns. A growing Shanghai Covid outbreak and a rare one-week shutdown of Macau casinos are adding to the gloom. A gauge of Hong Kong-listed Macau casinos shed 5.6%.

“Fears of a resurgence in Covid may give the market a perfect excuse to correct, as people have become more sensitive to upticks in cases after the Shanghai lockdown, which was the biggest blow to confidence since the beginning of the pandemic,” said Jiang Liangqing, fund manager at Zhuhai Greenbamboo Private Fund Management.

He said the reopening rally is ending here, adding that if cases continue to rise, investors will start questioning whether earnings had bottomed out in the second quarter.

To be sure, bullish calls have continued to trickle through in the past few days, with investors like PineBridge Investments and Man Group all joining the chorus. Optimists cite economic normalization, cheap valuations and the boost from policy stimulus by Chinese authorities.

READ: Citi Joins Man Group and PineBridge as Bullish on China Stocks

Yet for some, the upward momentum is losing steam.

Investors need to see more “market-boosting news” for the uptrend to continue, said Zhang at MX Capital. “Funds will leave traditional energy firms as future earnings are seen weakening, while it is increasingly hard for new energy firms to impress, given ultra-high expectations for the sectors.”

(Updates prices throughout, adds quote)

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