The sudden drop of some stocks sparked caution in the A-share market on Friday, with analysts saying China's financial tightening will curb speculative trading and continue to exert pressure on prices among smaller-cap stocks.
The CSI 300 Index, which tracks the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges, slumped by 3 percent on Thursday, the biggest loss since June 2016. A total of 200 listed companies saw their share price tumble by the 10 percent daily trading limit.
While the market recovered some of the loss on Friday, with the benchmark Shanghai Composite Index rebounding by 0.44 percent, investors' sentiment remained fragile, especially toward companies with trust or asset management products as their top shareholders.
Equity analysts said that the sudden market drop could be caused by investors share dumping, as they worry that the government's financial deleveraging efforts could lead to forced liquidation of some trust and asset management products.
"The speculative mood has been dampened by strengthening regulation. The deleveraging efforts and high valuations could lead to a sell-off of some expensive small-cap stocks," according to Chen Jiahe, chief strategist at Cinda Securities Co.
China's securities and banking regulators have asked trust companies to reduce trading leverage and have suspended some of their structured securities investment, Chinese media reported, citing people familiar with the matter.
The move was part of the country's ongoing push to regulate its rapidly growing asset and wealth management sector, which involves many obscure investment products with complex structures and high trading leverage.
Some financial institutions have begun to clean up their risky business by selling or liquidating matured investment products in compliance with the tightened regulation, which could be one of the reasons triggering the market fall, analysts said.
"Some trusts and asset management products are maturing and they cannot roll over due to China's deleveraging measures, so the only solution is to dump shares," Wang Chen, a Shanghai-based partner at XuFunds Investment Management Co, was quoted by Bloomberg as saying.