China is hot and soaring among all the other equity markets this year thanks to improving economic growth. In fact, China is leading the global markets, attaining the best-performing country spot in the year-to-date time frame.

But the incredible run eased somewhat last week as a combination of factors including tightening liquidity and jitters over bond markets led to steep sell-off in the large-cap shares. The blue-chip CSI300 Index tumbled nearly 3% on Nov 23, marking the worst one-day loss in nearly 18 months. The sell-off was again witnessed on Nov 27, with CSI 300 Index dropping 1.3%.

Inside The Pain

Worries over tightening liquidity have built up lately as China took steps to restrict the rapidly growing and lightly regulated market for online micro-lenders to fend off financial risk. The central bank has suspended regulatory approval for setting up of new Internet micro-lenders, sending shares of U.S.-listed Chinese financial firms into a tailspin.

Meanwhile, rising Chinese bond yields spooked investors, dulling the attractiveness of the stock markets as an alternative higher-yielding investment. This is because rising yields will increase financing costs and thus have a negative impact on corporate profits.

If these weren’t enough, the Chinese government’s warning about lofty valuation for one of the nation’s hottest stocks, Kweichow Moutai Co, added to the woes. The government cautioned that shares of China’s biggest liquor maker is rising too fast, creating panic among investors.  

Rounds of downbeat data also took a toll on the stock market. Profits at China’s industrial firms slightly cooled down in October, rising 25.1% after jumping 27.7% in September. Meanwhile, debt climbed 23% in September – the fastest pace in four years.

ETF Impact

Quite expectedly, the terrible trading has been felt in the Chinese ETF world too. Funds in this space also saw big losses over the past one week. VanEck Vectors China SME-ChiNext ETF (CNXT – Free Report) was the biggest loser shedding 4.8% in the same time frame, followed by declines of 3.3% in Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (ASHS – Free Report) , and 2.6% each in Guggenheim China Technology ETF (CQQQ – Free Report) and Global X NASDAQ China Technology ETF (QQQC – Free Report).