Chinese key stock index falls by the most in 10 weeks as central bank refrains from stimulus to arrest economic slowdown

China’s stocks dropped by their most in 10 weeks on concern policymakers were not doing enough to arrest the decline in the nation’s economic growth, while a recent rally of smaller companies was judged to have been excessive. Hong Kong’s benchmark stock index also ended lower.

The Shanghai Composite Index sank 1.7 per cent to 2,978.12 at the close on Tuesday, the biggest one-day decline since July 8, while the ChiNext gauge of smaller firms retreated 2.1 per cent. The Hang Seng Index lost 1.2 per cent to 26,790.24 as the shares of subway operator MTR fell after one of its trains derailed for the first time in history.

While traders had anticipated aggressive China’s authorities to loosen monetary and fiscal policies following yesterday’s slew of August economic data that all missed forecasts, and were assessing the impact of soaring oil prices on corporate earnings, China’s central bank today refrained from lowering the rate on the medium-term lending facility (MLF). The funding tool for commercial lenders, via its open-market operation, was kept unchanged at 3.3 per cent.

A rout on China’s small-cap stocks added to the negative mood, as trades rushed to pocket their gains after a 20 per cent gain in the sector over the past three months made them five times as expensive as the benchmark gauge. The ChiNext index was valued at 72.1 times earnings, compared with the multiple of 14.7 times for the benchmark Shanghai Composite, according to Bloomberg data.

“Small-caps are very expensive after the run-up and investors are rushing to pocket profits now,” said Dai Ming, a Shanghai-based fund manager at Hengsheng Asset in Shanghai. “Their earnings outlook may not justify the current valuations, given the poor macroeconomy environment in China.”