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SHANGHAI, July 27 (Reuters) - China stocks closed sharply lower on Wednesday, with major indexes suffering their worst daily losses in six weeks, as investors sold off on worries that regulatory changes are coming.
The slide was led by small caps, with the Chinext Growth Index, which mostly tracks smaller tech firms in Shenzhen, correcting nearly 6 percent.
But blue chip financials also fell, as did a few clusters of hot concept stocks such as makers of advanced materials that had seen massive spikes in volume in recent days for no particular reason.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 1.6 percent, to 3,218.24 points, while the Shanghai Composite Index lost 1.9 percent to 2,992.00. Both were down more than 3 percent at one point in mid-afternoon trade.
Analysts pointed to a meeting in Beijing on Tuesday in which officials warned of asset bubbles, without being more specific.
That appeared to add force to media reports that regulators were preparing to restrict China's vast retail wealth management sector from buying stocks.
The reaction comes amid signs that China's economic recovery is being increasingly driven by distorted financial flows into speculative real estate and government-driven infrastructure spending, instead of more sustainable growth drivers.
"The rise in overall leverage and further expansion of shadow banking activity are pushing up financial risks," analysts from ratings agency Moody's said in a report released earlier on Wednesday.
Wealth management products are one of the biggest sources of shadow banking activity in China and invest in a variety of things, including equities.
Shadow banking assets in China increased by 30 percent last year, reaching almost 54 trillion yuan ($8.10 trillion), and now accounts for nearly a third of the country's total banking sector assets, according to Moody's.
Adding to fears that China's growth is becoming increasingly lopsided and more reliant on government spending, growth in private investment has shrunk to record lows.
A survey by Westpac MNI showed Chinese consumer sentiment also backed off in July, with a rising proportion of consumers holding off on large scale purchases. At the same time, data showed box office receipts at movie theatres - seen by many as a bellwether of core consumer demand - dropped 4.6 percent in the second quarter of 2016.
Stocks were dealt another blow after the Shenzhen Stock exchange increased disclosure requirements for companies whose shares have seen unexplained sharp movements.
That policy appears to have taken the air out of a massive rally in companies involved in new materials such as super-strong graphene. Analysts had struggled to explain the trend in the absence of any specific news or policy announcements.
However, such fleeting spikes and crashes are frequent in China's stock markets where investors generally tend to only hold shares for short periods of time.
"The measure is mainly intended to curb irrational speculation, which could be good for the overall market in the long run, yet could bode ill for speculative stocks in the short term," said Zhang Qi, analyst at Haitong Securities. (Reporting by the Shanghai Newsroom; Editing by Kim Coghill)