China’s stocks slumped, as a neutral lending stance from the central bank and data showing surging economic activity renewed concerns about tightening liquidity.

The CSI 300 Index closed 2.2 per cent lower, after falling nearly 3 per cent in afternoon trading. Stocks had initially pared losses on data showing growth rates of more than 30 per cent for key economic indicators. Traders said sentiment was driven by the central bank’s offering of medium-term funds to lenders, which was just enough to offset what was coming due.

The neutral stance by the People’s Bank of China bolstered expectations that a liquidity tightening trend was intact as the economy improves. Consumer staples and health care-related firms were among the biggest losers as investors continued to rotate out of expensive stocks. Liquor maker Luzhou Laojiao Co. fell 7 per cent and its peer Wuliangye Yibin Co. slipped 5.1 per cent. The liquidity sensitive ChiNext index dropped 4.1 per cent.

“The economic data is mostly positive but China’s MLF operation reinforces expectations that liquidity tightening will continue,” said Ken Chen, an analyst at KGI Securities. “Liquidity concerns remain the biggest overhang on stocks.”

The People’s Bank of China injected 100 billion yuan (US$15 billion) through its medium-term lending facility on Monday. Meanwhile, the latest economic data from industrial production to retail sales beat economists’ forecasts, suggesting aggressive central bank easing is less crucial.

That means Beijing may hold a tightening bias in its monetary policy in months ahead, which hurts sentiment in the stock market. The overnight repurchase rate -- a gauge of short-term interbank borrowing costs -- jumped 46 basis points, the most in about a month, to 2.24 per cent.

Traders are closely watching whether a low for the CSI 300 reached over the National People’s Congress last week will be breached again. The gauge has tanked by more than 13 per cent from a 13-year high on Feb. 10, with about US$1 trillion of value erased in the nation’s equity market.

China avoided monetary easing ahead of the Lunar Near Year holiday, raising concerns over tighter liquidity conditions. That came as the PBOC engineered the biggest liquidity squeeze in almost six years in January. Earlier this month, China’s top banking regulator jolted markets with a warning about the need to reduce leverage amid the rising risk of bubbles globally and in the local property sector.

“The reason behind the losses is something everyone is now aware of,” said Yang Wei, Fund Manager at Longwin Investment Management Co. “We might still continue to see some final momentum selling, but I think the bottom is near.”

--With assistance from Tian Chen.