Big small-cap slump drags down indices

A sharp slump in China's small-cap stocks pulled China's major stock indices lower on Monday, offsetting stronger-than-expected economic growth data.

A flood of supply from initial public offerings, the weak earnings performance of ChiNext shares and fears of further policy tightening also added to the gloomy mood.

Data from the National Bureau of Statistics on Monday showed that China's gross domestic product expanded 6.9 percent year-on-year in the first half, which is well above the government's target for the year of 6.5 percent, reflecting a firming trend in the nation's economy.

Growth in June industrial output and retail sales also came in stronger than expected.

The Shanghai Composite Index closed the day, however, with a 1.43 percent drop to 3,176.46 points. The Shenzhen Component Index dropped even more, by 3.57 percent.

The ChiNext startup index tumbled as much as 5.11 percent to a two-and-a-half-year low.

Nearly 500 stocks, most of them small firms, plunged to the 10 percent trading limit, a rare occurrence this year as the authorities attach great importance to maintaining stability in the stock market.

"Market regulators have emphasized financial markets should serve the real economy, hinting at the possibility that IPOs will continue and accelerate," said Hong Hao, chief strategist at BOCOM International Holdings Co.

"More supply of stocks, mostly smaller caps, slower credit growth and a weak ChiNext earnings season have all contributed to today's plunge," said Hong.

The country's financial regulators emphasized the need to develop the direct financing market to fund businesses, showing that the pace of initial public offerings will accelerate.

There were 246 IPOs in the Shanghai and Shenzhen bourses in the first half of 2017, increasing 303 percent year-on-year, according to accounting firm PricewaterhouseCoopers.

In contrast to larger, State-owned firms which are being buoyed most by the strong economy, an increasing number of once-high-flying startups are floundering－a trend epitomized by Leshi Internet & Information Corp, which unveiled over the weekend it swung to a loss in the first half.

China Merchant Securities said in report that "the high-valuation bubble is bursting".

Listed firms with good business performances will continue to be chased by investors ... while ChiNext will continue to find its bottom," the brokerage said, forecasting average earnings of ChiNext companies will fall to "single-digit" growth from an expected 25 percent this year.

China's blue-chip SSE50 Index, also called China's "Nifty Fifty", increased 0.32 percent to 2631.41 on Monday, which was the highest level in almost two years.

Reuters contributes to the story.