China shares slump most in 7 months as tightening fears mount

SHANGHAI, Feb 24 (Reuters) - Chinese shares closed lower on Wednesday, with the benchmark stock index witnessing its biggest daily drop in seven months, as investors worried about high valuations amid growing concerns of tightening in policies.

The benchmark Shanghai Composite Index sank 2% to 3,564.08, in its biggest daily percentage loss since July 24. The blue-chip CSI300 index slid 2.6%.

Leading the losses, the material sub-index slumped 4.71%, while the consumer staples sector dropped 4.46% and the healthcare sector slid 4.41%.

"Those sectors gained too much in previous sessions and valuations are still near record highs," said Zhang Qi, analyst with Haitong Securities.

Investors are rotating out of consumer shares, and some fund managers have even stopped new subscriptions into funds such as those heavily invested in high-valued liquor shares, Zhang added.

China's benchmark index has lost 3.6% so far this week over policy-tightening worries, after advancing to a more than 13-year high in February on optimism around the country's economic recovery.

That is despite indications that while the central bank will scale back support for the economy in 2021 and cool credit growth, fears of debt defaults and a derailed recovery will prevent it from tightening any time soon.

The smaller Shenzhen index ended down 2.03% and the tech-heavy start-up board ChiNext Composite index was weaker by 3.37%.

The losses on Wednesday came alongside steep falls in Hong Kong after the city's government announced a stamp duty hike. The Hang Seng index was 3% lower in late afternoon trade.

But Yan Kaiwen, an analyst with China Fortune Securities, said the move could bode well for the mainland A-share market in the short term.

"Though sentiment was weak for now, and fund managers may be forced to sell A-shares to deal with redemptions made by mainland investors who invested in Hong Kong stocks via mutual funds," Yan said.