GOLDMAN: 5 reasons Chinese stocks are getting smoked

china fire drill training

(REUTERS/China Daily) Members of an emergency rescue team of a Sinopec oil field carry a mock victim (C) as they participate in a drill simulating a fire incident at a firefighting training centre in Puyang, Henan province.

Chinese stocks are approaching a bear market.

On Monday, the Shanghai Composite plunged 8.5% in its worst single-day percentage decline in eight years. And on Tuesday, the index opened 4% lower, though the session was more mixed.

In a note Tuesday, Goldman analysts highlight five reasons Chinese stocks are selling off.

They are:

• The State Council is due to deliver a statement Friday that could signal a wider trading band for the renminbi. Investors are concerned that this could make the currency more volatile and spark a flight of capital out of China.

• The July manufacturing PMI fell month-over-month to 48.2 from 49.2 and missed expectations (from the Bloomberg consensus) of 49.7. It's a volatile indicator, Goldman notes, but it could be a signal of weakness in the broader economy for June.

• Many investors don't find the risk/reward profile attractive anymore.

• The government intervened strongly in the stock market, but that's making investors wary. The whisper is that the government has sponsored about $100 billion of stock purchases — supply that would eventually need to be absorbed.

• Foreign investors aren't bullish on the market, either. Goldman has gleaned from recent conversations that the suspension of stocks has soured sentiment toward A shares. Up to 52% of listed companies were suspended at the peak on July 9.

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