Chinese stocks faced their heaviest selling in weeks, as investors awaited new catalysts, after the nation’s reopening drove world-beating rallies. 

The CSI 300 Index, a benchmark of mainland shares, had fallen 1.7% as of mid-Friday (Feb 3), headed for its worst day since the reopening euphoria started at the end of October. A drop in the Hang Seng China Enterprises Index, which tracks Chinese stocks trading in Hong Kong, also put the gauge on track for its largest weekly loss since then.

The setback suggests sentiment is turning more cautious after optimism over China’s Covid Zero policy exit led to scorching gains over the past three months. While data during the Lunar New Year holidays pointed to a comeback in consumer spending, the economy has yet to regain its footing with weakness in the property market a key drag. 

“There is a growing divergence in views on the pace of recovery, with retail investors less confident and expecting only slow and gradual progress,” said Liu Dejun, the managing director of Beijing Guanghua Private Fund Management Co. “Most institutional investors have increased exposure and remain upbeat over the long term.” 

Some of Friday’s worst performers on the Hang Seng China gauge were those that had posted the largest gains in this rebound, including Country Garden Services Holdings Co and Baidu Inc. Foreign investors were also on track to offload mainland shares for the first time since Jan 3, having boosted holdings at a record monthly pace. 

China bulls are likely to see the sell-off as a short-term correction, rather than the start of a downturn. Analysts at Citigroup Inc this week said the reopening trade has more room to run amid the nation’s strong economic outlook, while those at Jefferies Financial Group Inc anticipate an upgrade in earnings estimates.   

“I don’t expect the panic-selling of 2022 to return. However, it is good to be cautious given the strong rally,” said Qi Wang, the chief executive officer of MegaTrust Investment in Hong Kong.

  - Bloomberg