China stocks set for biggest weekly pullback in five months

By Jiaxing Li

HONG KONG, Sept 5 (Reuters) - China's stocks steadied on Friday after steep losses in the previous session, but remained on course for their biggest weekly falls in five months as market participants took profits following a two-month rally.

The Shanghai Composite Index .SSEC lost 0.1% in early trade. The benchmark has now declined 2.5% this week, on track for the sharpest weekly drop since early April.

China's blue-chip CSI300 Index .CSI300 swung between gains and losses in the opening hour, and by mid-morning was down nearly 3% for the week, set for the biggest decline since December.

Tech shares led the pullback this week, with the AI sector .CSI930713 down 9.2% and the semiconductor sector .CSI931865 dropping 8.9%. Chip designer Cambricon 688256.SS sank more than 18%, putting it on track for its biggest weekly loss in nearly two years.

Selling pressure carried over into Friday as profit-taking gathered pace following the conclusion of China's largest-ever military parade, while a Bloomberg News report that Beijing is considering measures to curb excessive stock speculation led to market jitters.

The correction snapped a two-month surge that had pushed Shanghai's benchmark to 10-year highs, powered by record sums of leveraged bets chasing the rally.

"Risk appetite is weakening as outsized gains triggered profit-taking and a technical correction," analysts at China Securities wrote in a note, adding that trading could remain volatile as the market enters a consolidation period.

China's central bank said on Thursday it would inject 1 trillion yuan into the banking system on Friday via outright reverse repo operations to keep liquidity "reasonably ample", interpreted by some as a gesture to calm investors.

"Taking some of the air out of the frothy part of the market is setting up for a more sustainable path down the line," said Jerry Wu, a portfolio manager at Polar Capital, based in London.

"It will be a healthy correction and I don't think it changes the direction of travel, which we do believe is a sort of innovation-driven rally."

Hong Kong's benchmark Hang Seng .HSI was up 0.5% on Friday, heading to a weekly gain of 0.1%.