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Chinese stock investors are running out of places to hide.

First, it was the Macau casinos, which began tumbling in January after an average 217 percent rally in the previous two years. Then came the selloff in Internet shares, which dragged down Tencent Holdings Ltd. and Sina Corp. more than 15 percent since March. Small-cap stocks were the latest to buckle, with the ChiNext Index entering a bear market last week.

The few pockets of strength in the $3.2 trillion stock market are disappearing as China’s weakening economy reduces investor appetite for even the fastest-growing companies. All 10 industry groups in the CSI 300 Index of mainland-traded shares have retreated this year while just 1 percent of the 170 Chinese stock funds tracked by Bloomberg recorded gains, versus more than 70 percent last year.

“If I were a non-emerging market investor and I had a choice, I wouldn’t be investing in China at all at the moment,” John-Paul Smith, the London-based emerging-market strategist at Deutsche Bank AG (DBK), said by phone yesterday. He warned in March that risks in the Chinese market were increasing as investors piled into a diminishing number of rising stocks.

Small-cap stocks, casinos and Internet companies had attracted money managers because the companies were seen as ways to tap into China’s growing consumer sector while being relatively sheltered from state intervention.

Speculation Rally

Galaxy Entertainment Group Ltd. (27), billionaire Lui Che Woo’s casino company, surged 129 percent last year even as declines in state-owned companies such as PetroChina Co. dragged down the CSI 300 by 7.7 percent.

The index has dropped another 9.2 percent so far this year, while the Hang Seng China Enterprises Index of Hong Kong-listed shares declined 8.3 percent and the Bloomberg China-US Equity Index slid 4.9 percent. The ChiNext index of shares in Shenzhen has retreated 5.8 percent.

“With small-caps retreating and big-caps in the doldrums, there’s no sector in China’s stock market investors can find now to put their money in,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. Many ChiNext companies “don’t have solid fundamentals or growth prospects and the rally was pretty much based on speculation.”

The ChiNext jumped 163 percent from a low on Dec. 3, 2012 through Feb. 17 this year as the government took steps to boost the technology and services industries. The rally drove valuations to 5.7 times net assets, more than twice the level of U.S. small-cap stocks in the Russell 2000 Index, data compiled by Bloomberg show.

New IPOs

The ChiNext rose 2.5 percent as of 9:56 a.m., heading for the biggest gain since March 17, after the government announced it plans to have about 100 initial public offerings from June through the end of the year. UBS AG (UBSN) strategist Chen Li said in a report that small-cap stocks may rebound as the number was less than his estimate of 350 to 400 IPOs.

Investors have gotten too bearish on small-caps, Aaron Boesky, the chief executive officer of Marco Polo Pure Asset Management in Hong Kong, said in a phone interview on May 16.

“Valuations have run up, but that’s justified given China’s future growth story,” Boesky said. “Services and technology will drive growth in the economy. That’s not just a short-term story but also a next decade story. You have to buy on the dips.”

‘New Normal’

China’s President Xi Jinping said this month that the nation needs to adapt to a “new normal” in the pace of economic growth. Industrial-output and investment growth unexpectedly decelerated last month, while new building construction fell 22 percent in the first four months of the year. New-home prices rose in April in the fewest cities in a year and a half as developers offered discounts.

Chinese money managers have reduced their positions in small-cap stocks to 32.9 percent of holdings as of May 15, from 36.6 percent on March 24, according to Hao Hong, the Hong Kong-based China equity strategist at Bocom International Holdings.

Some Chinese stock pickers have managed to skirt the selloff. The Aberdeen Global-Chinese Equity Fund, which has $2.3 billion of assets, climbed 0.5 percent, according to data compiled by Bloomberg. PetroChina, the fund’s fifth-biggest holding at the end of March, rallied in Hong Kong after its chairman said the company is considering opening up to private investment.

It’s “not a bad time to look into investing” in China for those with a long-term time horizon, Nicholas Yeo, a money manager at Aberdeen in Hong Kong, said by e-mail.

Still, it’s becoming harder to find stock-market winners. Of the 300 shares in China’s large-cap index, about 245 have fallen so far this year.

Tencent, Sina

Tencent, Asia’s largest Internet company, lost 15 percent in Hong Kong since March 6, after a 1,266 percent surge during the previous five years sent its price-to-earnings ratio to the highest level since 2008. Sina, operator of a web portal in China, has fallen 43 percent in New York trading this year.

Shares of the six-biggest listed Macau casino operators tumbled amid speculation that China will crack down on illegal fund transfers and tighten visa rules. MGM China Holdings Ltd. and Galaxy Entertainment have both dropped at least 15 percent.

“Both tech and casino stocks have been the winners over the past few years but have since underperformed,” Audrey Goh, a Singapore-based investment strategist at Standard Chartered Plc (STAN), said in an e-mailed response to questions. “The market is still trying to figure out where the next big winner would be.”

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