* SSEC -0.1 pct, CSI300 +0.2 pct, HSI +0.6 pct
* ChiNext tumbles to 2-1/2-year lows on supply, earnings concern
* State firms benefit most from better-than-expected GDP growth
SHANGHAI, July 17 (Reuters) - China’s major stock indexes recouped sharp early losses on Monday as robust economic growth data buoyed earnings prospects for blue chips, prompting investors to dump highly speculative small caps.
Fears of further policy tightening and a flood of supply from initial public offerings also added to the gloomy mood in early trading, though sentiment improved after data showed the economy expanded 6.9 percent in the second quarter, slightly faster than expected.
Growth in June industrial output and retail sales also came in stronger than expected.
China’s blue-chip CSI300 index rose 0.2 percent to 3,711.16 points by the end of the morning session, while the Shanghai Composite Index was roughly flat at 3,218.75. Both had been down more than 2 percent in early trade.
However, the start-up board ChiNext tumbled as much as 5.3 percent to a 2-1/2 year low, before recouping some losses. The gauge ended the morning down 3.4 percent.
“The game of story-telling in ChiNext is over,” said Shen Weizheng, fund manager at Ivy Capital.
“You need to buy blue-chips with good earnings.”
Chinese investors dropped small-cap stocks after President Xi Jinping vowed over the weekend to strengthen financial supervision and expand direct financing, which will potentially boost equity supply.
In contrast to larger, state-owned firms which are being buoyed most by the strong economy, an increasing number of once-high-flying start-ups are floundering - a trend epitomized by Leshi Internet & Information Corp, which unveiled over the weekend it swung to a loss in the first half.
Investors also attribute stocks’ diverging fortunes to policy messages from the fifth National Financial Work Conference held over the weekend, in which President Xi vowed to strengthen the Communist Party’s leadership in the financial sector.
Interpreting the conference, China Merchant Securities said in report that “the high-valuation bubble is bursting” as the pace of initial public offerings will accelerate.
“Listed firms with good business performance will continue to be chased by investors ... while ChiNext will continue to find its bottom,” the brokerage said, forecasting average earnings of ChiNext companies will fall to “single-digit” growth from an expected 25 percent this year.
The SSE50 Index, dubbed China’s “Nifty Fifty”, continued to climb, rising 1.5 percent to the highest level in almost two years.
Hong Kong shares were on track to rise for the sixth straight session, amid signs Chinese investors are accelerating investments into the city.
The Hang Seng index added 0.6 percent to 26,542.00, while the Hong Kong China Enterprises Index gained 1.1 percent to 10,846.36.
Last week, nearly 9 billion yuan ($1.33 billion) worth of Chinese money flowed into Hong Kong stocks, with buying concentrated in the financial sector, the China Securities Journal reported on Monday. ($1 = 6.7687 Chinese yuan renminbi)
Reporting by Samuel Shen and John Ruwitch; Editing by Kim Coghill