MSCI Inc’s key gauge for Chinese stocks is on course for a technical correction as traders take money off the table, ahead of a July meeting of the nation’s top leaders. 

The MSCI China Index dropped as much as 2% on Thursday, taking declines from a May 20 high to about 10% intraday. Tencent Holdings Ltd and Alibaba Group Holding Ltd were among the biggest drags on the gauge. The Hong Kong equity benchmark is also close to entering correction territory, after falling as much as 2.3%. 

A rally that propelled Chinese equities into bull markets earlier this year has been faltering, as concerns persist over a patchy economic recovery and earnings outlook. Investors have shifted their attention to the Third Plenum, the July meeting that has historically been a venue where the Communist Party announces big shifts in economic policy. 

“The market is looking for direction ahead of the plenum,” said Billy Leung, an investment strategist at Global X ETFs. “I would lean towards risk off ahead of the plenum, especially as recent policy initiatives have been unexciting. But I think a major selloff is unlikely, as it’s not warranted by fundamentals or technical.”

The Third Plenum will take place from July 15 to 18 in Beijing, Xinhua News Agency reported on Thursday. Money managers including Man Group and Invesco Ltd are expecting more supportive measures from the meeting, to boost the economy and deepen reforms.

The MSCI gauge’s slide after a 32% gain from a January low, evoked memories of previous rallies that were quickly overshadowed by selloffs, amid concerns over geopolitics and China’s slowing economy. Any disappointment on the meeting’s outcomes may lead to further losses in Chinese stocks, ahead of the US elections. 

Investor sentiment was also weighed by weakness in the yuan and a decline in artificial intelligence stocks. Traders will also be watching the US presidential debate between Donald Trump and President Joe Biden for clues on their policy approach to Asia’s largest economy.

“A weakening yuan is weighing on Chinese stock markets,” said Linda Lam, head of equity advisory North Asia at Union Bancaire Privee. “Investors are also staying on the sidelines approaching half-year-end, with a lack of risk appetite to build new positions. This could be a cyclical soft patch, while investors are waiting for clearer policy direction from the Third Plenum.”

  - Bloomberg