OPTIMISM over China’s economy has driven gains in the world’s second-largest equity market this year. But that budding recovery could also be investors’ undoing.

    Some money managers are turning cautious on Chinese shares on concern the economic rebound will spur the central bank to tighten monetary policy further. While the People’s Bank of China Governor Zhou Xiaochuan reiterated the bank’s neutral course in a press conference Friday and officials have steered clear of boosting benchmark interest rates so far, China’s markets have started to price in a “major hawkish shift” from the central bank, according to Goldman Sachs Group Inc.

    “Where stocks will head will really depend on how fast the government tightens monetary policy and how fast company earnings will recover — it’s like a competition between these two things,” said Dai Ming, who manages a fund of structured products for investing in Chinese equities at Hengsheng Asset Management Co. in Shanghai. “There could be a further correction in the stock market.”

    The CSI 300 Index has climbed 3.6 percent in 2017, winding back some of last year’s 11 percent slump as evidence China’s economy is on a stronger footing started to mount. Some at the end of 2016 were bullish, predicting a strong rally as signs of growth become more embedded.

    But the CSI 300 slumped the most in almost three weeks Thursday after an uptick in producer price growth boosted the outlook for Chinese, and global, reflation. The economy accelerated for the first time in two years last quarter, manufacturing is gathering pace and China saw its steepest import growth in five years in February.

    While the market fallout from the central bank’s focus on curbing leverage has so far centered on bonds , the potential for tightening is a main risk for shares, said Shi Bo, chief investment officer at China Southern Asset Management Co., the country’s fifth-largest mutual fund manager.

    (SD-Agencies)