Chinese stocks head for biggest weekly loss since 2016 amid concerns about smaller companies’ earnings

China’s stocks retreated for a fourth day, sending the benchmark gauge to the lowest level in two weeks, on mounting concern that earnings growth for smaller stocks will miss estimates.

Hong Kong’s market also dropped. The city’s benchmark Hang Seng Index retreated 0.75 per cent on Thursday, or 245.18 points, to 32,642.09. The Hang Seng China Enterprises Index, or the H-share gauge, also slipped 0.94 per cent.

Developers ran counter to the decline after the Federal Reserve kept borrowing costs unchanged. China Overseas Land jumped 3.96 per cent to HK$31.5, China Resources Land added 3.69 per cent to HK$32.35, and Sino Land advanced 1.66 per cent to HK$14.66.

In the mainland, the Shanghai Composite Index slid 0.97 per cent, or 33.85 points, to 3,446.98 on Thursday, heading for a 3.3 per cent decline this week, which would be the biggest weekly loss since 2016. The CSI 300 Index of large companies also retreated 0.7 per cent, while the ChiNext gauge of small caps tumbled 2.17 per cent to close at the lowest level in six months. Hong Kong stocks also dropped.

While large companies including Gree Electric Appliances and Wuliangye Yibin continued to fall back after easily beating the benchmark last year, top-ranked brokerage Shenwan Hongyuan Group said the deceleration of earnings growth for smaller firms would persist.

As stakeholders in smaller companies often use their shares as collateral to borrow from banks or brokerages, declines in share prices may lead to forced sell-off, according to Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai.

“Small-caps are in a vicious circle,” he said. “Stocks drop on weaker earnings and then the declines trigger more selling as lots of shares are pledged for financing purposes. Once the stocks fall to levels seen as dangerous by lenders, the pledged stocks would be dumped and that leads to a cave-in in stock prices.”

Among small-cap stocks, Xinjiang Sailing Information Technology tumbled by the daily 10 per cent limit to 27.21 yuan after saying a major shareholder plans to sell a 4 per cent stake in the next six months.

Hunan China Sun Pharmaceutical Machinery also plunged nearly 10 per cent to 8.49 yuan. The company had 1.6 million pledged shares up for sale, with the forced sale triggered when a senior executive failed to repay debts owed to a brokerage, Sun Pharmaceutical said in a statement.

Profit growth for the ChiNext-listed companies may have slowed to 17 per cent in the fourth quarter from 24 per cent in the previous three-month period, based on earnings forecasts and preliminary results released by 98 per cent of the firms on the board, analysts led by Liu Yang at Shenwan Hongyuan wrote in a note on Thursday.

Chinese car-maker GAC Group led the declines among large companies, sliding 10 per cent to 21.6 yuan. Liquor distiller Wuliangye dropped 1.66 per cent to 82.98 yuan. Greenland Holdings lost 3.46 per cent to 8.92 yuan.