Last year’s most-profitable bets on the Chinese economy have turned into money losers in 2014 as policy makers send mixed signals on which industries will lead the country’s expansion.

After surging at least 20 percent for the biggest gains in China’s stock market last year, gauges of technology, health-care and consumer shares have all lost more than 6 percent. The companies, tied to what analysts have dubbed China’s “new economy,” are now falling in tandem with “old economy” stocks in state sectors such as commodities and finance that fueled growth in the last decade. All 10 industries in the CSI 300 Index (SHSZ300) sank in the first half, the broadest losses in four years.

The declines suggest investors may be doubting China’s commitment to fostering a shift toward technology and services, putting at risk returns on smaller companies that have been the best in the past two years and the biggest among initial public offerings. While President Xi Jinping said in May the nation must adapt to a “new normal” pace of growth, in which innovation plays an increasing role, the government has also sped up state spending and eased credit curbs as the weakening property market puts its 7.5 percent expansion target at risk.

“The market is now pricing in the risk that China won’t make a successful transition,” Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co., which oversees about $120 million, said by phone on July 4. The shift “will be much more difficult.”

Services Push

New economy stocks had advanced as China’s cabinet approved plans in 2012 to boost seven “strategic” industries, including technology. The government included in its five-year plan a target of lifting the proportion of service industries in the economy to 47 percent by 2015 from 46.1 percent in 2013.

Less than six weeks after Xi’s comments on China’s new normal, Premier Li Keqiang said in a speech in London that the government is “adjusting its economic operations to ensure the minimum growth rate is 7.5 percent.” Policy makers have lowered reserve requirements for some lenders, sped up spending of state funds and announced plans to build railways since April.

Leaders in the world’s second-largest economy are trying to prop up growth amid a weakening property market that dragged down home prices for two straight months through June, the first declines in almost two years.

“The government won’t be willing to take in the short-term pain, so they are following a two-step approach: buy time, and if the economy stabilizes, then they will focus more on the reforms,” Shen Minggao, Citigroup Inc. (C)’s head of China research, said by phone from Hong Kong on July 2.

Relative Valuations

Shen, who preferred new economy shares last year, now favors old economy stocks in part because they’re cheaper and the nation’s growth rate is stabilizing. China’s manufacturing expanded in June at the fastest pace this year.

The CSI 300 Materials Index, whose biggest constituents include Anhui Conch Cement Co. and Zijin Mining Group Co. (601899), is valued at 15 times estimated earnings for the next 12 months while the index of financial companies has a ratio of 5.5. Benchmark gauges of technology and health care companies have multiples of 23 and 19, respectively.

The CSI 300 Index, which tracks China’s biggest mainland-listed companies, has dropped 6.6 percent this year, while the Shanghai Composite Index declined 2.7 percent. The Bloomberg China-US Equity Index of U.S.-listed shares climbed 2.3 percent. The CSI 300 slipped 0.1 percent at the close today, dragged down by technology shares. The Shanghai Composite was little changed.

Transformers Sales

Jonathan Garner, the chief Asia and emerging market strategist at Morgan Stanley (MS) in Hong Kong, said by phone on July 2 that he still favors companies in the consumer, technology and health-care industries while recommending underweight positions in materials and industrial companies.

Garner pointed to Chinese sales of the blockbuster “Transformers: Age of Extinction,” which exceeded those from the U.S. in the film’s opening days, as the latest evidence that China’s new economy is still going strong. The nation’s e-commerce purchases, auto sales and airline passengers have all been growing at double-digit rates, he wrote in a July 2 report.

Some of the government’s recent stimulus measures have also been targeted at businesses in the new economy. The People’s Bank of China approved reserve-requirement cuts last month for banks that lend to smaller companies, which are prevalent in the technology and consumer-services industries. The banking regulator also changed the way loan-to-deposit ratios are devised to allow lenders to exclude loans to small enterprises, giving them greater capacity to extend credit.

Stocks Drop

The E Fund ChiNext Price Index (159915) exchange-traded fund, which tracks the benchmark gauge of the nation’s small-capitalization stocks, has delivered the highest risk-adjusted return among 23 Chinese ETFs during the past two years as an 86 percent return compensated investors for bearing the highest volatility. The 50 smallest initial public offerings in the four years through June surged 151 percent on average, versus a loss of 22 percent for the largest deals, according to data compiled by Bloomberg.

Recent declines in new economy stocks signal investor skepticism that the transformation will be successful, according to Haitong Securities Co.

The CSI 300 Healthcare Index has dropped 12 percent this year after a 23 percent rally in 2013, while the technology gauge slumped 8 percent after surging 39 percent last year. The CSI 300 Consumer Discretionary Index has lost 7.8 percent, versus an 8.7 percent rally in the equivalent gauge for emerging markets. While the ChiNext index has climbed 6.9 percent this year, it’s still down 11 percent from this year’s high in February.

“We need to see economic growth accelerate, or the transformation of the economic structure succeed,” Chen Ruiming, a Shanghai-based strategist at Haitong Securities who correctly predicted the Shanghai Composite’s slide below 2,000 in 2012, said in a July 3 phone interview. “But neither of the two will materialize in three to five years and that’ll be a long process.”