SHANGHAI/SINGAPORE, Oct 10 (Reuters) - Conflict in the Middle East has cast a fresh cloud over China's battered stock market, driving down exposed stocks - especially those linked with infrastructure projects in the region - as investors peppered companies with queries on the fallout.
Clashes between Israel and the Palestinian Islamist group Hamas have claimed more than 1,500 lives since Hamas' surprise strike on Saturday and have spurred a rally in oil and gold prices and selling in riskier assets as global investors turn cautious that the conflict could spread. China's benchmark index fell for a second session on Tuesday, despite signs of a domestic economic recovery and gains on Wall Street, with shares from steelmakers to railway builders down on concerns over potential disruptions to their businesses.
Infrastructure giants suffered the heaviest losses on worries that prolonged fighting would inflame regional tensions and put the brakes on projects planned as part of China's decade-old belt and road initiative (BRI), though some aerospace and defence stocks rose.
"Uncertainty was still high in domestic market despite improved economic data, facing the double whammy of U.S. employment data (driving up interest rates) and Middle East risks," said Xu Wenyu, an analyst at Huatai Futures.
China's muted diplomatic stance - it has called for de-escalation but stopped short of condemning Hamas - has also drawn criticism from Israel and the U.S. and added to investors nervousness about how the conflict could spill into geopolitics.
"The silence is kind of negative to the market," said a mainland China-based strategist who declined to be identified due to the sensitivity of the topic.
INVESTOR WORRIES
Chinese investors have flooded listed companies ranging from fertilizer producers and oil companies to drone makers with questions related to the war on Shanghai and Shenzhen stock exchanges' investor relations platforms.
One investor asked Asia Potash International Investment Guangzhou Co if the war would change its plans to expand production of potash fertilizer.
"The war would affect fertilizer suppliers' production in the Dead Sea area," the Shenzhen-listed company said. However, "It won't change the company's strategy to expand production."
Most other companies didn't respond to investors' queries on the platforms or said there was no impact.
But confidence was rattled. Shares in a "belt and road" index slumped more than 2%, with construction giants with business in the Middle East leading losses.
State-owned China Communications Construction, which signed contracts worth $3 billion in the Middle East in the past three years, slumped 8.5%. China Railway Group and China State Construction Engineering Corp closed down 7.8% and 4%, respectively.
"The war would more or less negatively impact the firm's business in the Middle East," said a retail investor who declined to be identified.
Overseas investors dumped 5.4 billion yuan ($740 million) of Chinese shares via the Stock Connect on Tuesday.
Bucking the trend, drone maker Aerospace CH UAV Co was a gainer, up 6% in two days as drones were reported being widely used in the conflict. The company did not reply to investor queries but had said in May that the Middle East was one of its major markets.
The defense security index has risen 1.5% so far this week.
($1 = 7.2940 Chinese yuan) (Reporting by Shanghai Newsroom and Tom Westbrook in Singapore; Editing by Kim Coghill)
