Shanghai stocks were on track to drop the most in four months on Monday as investors dumped shares across the board after the top securities regulator vowed to "brandish the sword" and combat market misbehaviours. The market is also hurt by growing worries that China's economic recovery, and thus the "reflation trade", is ending, despite data showing the economy grew 6.9 percent in the first quarter, better than expected and the highest since July-September 2015. [nB9N1HK01P] The Shanghai Composite Index <.SSEC> lost 1.3 percent, to 3,203.21 points by the lunch break. Barring an afternoon rebound, the gauge will post its biggest one-day loss since mid- December, and end at a two-month low. The blue-chip CSI300 index <.CSI300> fell 0.9 percent, to 3,455.75 points. Liu Shiyu, chairman of the China Securities Regulatory Commission (CSRC) over the weekend urged stock exchanges "to resolutely combat behaviour that disturbs market order and in no way be lenient". [nL3N1HN04M] "Liu's harsh words extinguished interest in 'concept' stocks," said Chang Chengwei, analyst at Hengtai Futures Co. Chang, who brushed aside North Korea tensions as a factor impacting China shares, also attributed bearish sentiment to worries about renewed economic slowdown as the cycle of "stock replenishing" by companies comes to an end. Underscoring the impact of a tighter regulatory environment, shares of listed companies expected to benefit from China's planned Xiongan special economic zone plunged on Monday following their recent surge. Many "Xiongan concept" stocks, including Bohai Water <000605.SZ>, XuanHua Construction Machinery <000923.SZ>, Juli Sling <002342.SZ> and China Zhonghua Geotechnical Engineering <002542.SZ> tumbled by their 10 percent daily limit. Small-caps, which are often the subject of speculation and have under-performed blue-chips this year, also fell sharply. Shenzhen's start-up board ChiNext <.CHINEXTP> dropped 1.1 percent to its lowest level in nearly three months. "Risk appetite still muted; we remain constructive on large-cap blue chips," UBS said in its latest strategy report.
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