(Bloomberg) -- Chinese stocks erased their gains for March as earnings disappointments eroded optimism around a policy-driven rally that began in February.

The onshore benchmark CSI 300 Index slipped 1.2% Wednesday, closing below the level set on the last trading day in February. Similarly, a broad gauge of Shanghai-listed stocks dropped below the key threshold of 3,000 points for the first time since late last month.

The declines came as overseas investors sold a net 7.2 billion yuan ($996 million) of mainland shares via trading links with Hong Kong Wednesday, the biggest one-day outflow in more than two months. Disappointing earnings from companies such as BYD Co., Wuxi Biologics Cayman Inc. and China Mengniu Dairy Co. also hurt investor sentiment. 

“We stay relatively cautious on earnings recovery for Chinese equities through 1Q24 at least,” Morgan Stanley analyst Laura Wang wrote in a research note. “Downward earnings revisions could last well through late April.”

There remains plenty of skepticism about the resilience of the earnings recovery even after some companies reported better-than-expected results. This has been demonstrated by initial gains following upside surprises often being short-lived. There are also continued doubts over the country’s ability to meet its economic growth targets and disappointment over the perceived slow pace of Beijing’s stimulus measures. 

Geopolitical risks are a further overhang. Wuxi AppTec Co. shares have tumbled more than 50% this year, illustrating how US-China tensions can hurt earnings and prompt investors to sell. 

China’s Ministry of Commerce said Tuesday it is taking its dispute with the US over electric-vehicle subsidies to the World Trade Organization.

Wednesday’s losses may also be partly due to quarter-end positioning, and investors seeking to lighten holdings before holidays in the first week of April. 

“China, including Hong Kong equities, are poised to fall again,” said Redmond Wong, a market strategist at Saxo Capital Markets HK Ltd. “Growth is likely to disappoint, so will earnings.” 

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