China’s Small-Cap Stocks That Led Rally Set to Enter Bear Market

The ChiNext index of smaller companies in Shenzhen was poised to enter a bear market amid concern investors were unwinding margin bets in China’s most expensive stocks.

The 100-member gauge slid as much as 4.8 percent Tuesday, extending its loss from its June 3 peak to more than 20 percent. The index, which is dominated by technology shares, pared declines to 2.5 percent at the 11:30 a.m. local-time break. Leshi Internet Information & Technology (Beijing) Co. sank 4.4 percent, trimming its gain this year to 257 percent.

The ChiNext traded at a record 131 times reported earnings this month, five times the level of the Shanghai Composite Index, after the small-cap gauge tripled in just 12 months. The regulator announced plans June 12 to limit the amount brokerages can lend for stock trading, while margin positions on the Shanghai bourse fell for the first time in a month on Friday.

“Curbs on margin lending are hitting the smaller cap stocks harder because retail investors lever up to buy them,” said Bernard Aw, a Singapore-based strategist at IG Asia Pte Ltd.

Shenzhen Infogem Technologies Co. tumbled 7.6 percent. The stock trades at 1,309 times reported earnings. The Shenzhen Composite Index lost 3.3 percent, extending its drop from its June 12 high to 16 percent.

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