(Bloomberg) -- A selloff in Chinese small-cap stocks extended Tuesday as tighter market oversight pledged by the cabinet sparked fears over the delisting of those with weak financial health.

The CSI 2000 Index fell 7.2%, taking the decline this week to 11%. The CSI 300 Index, which tracks mostly blue-chip firms, outperformed. The benchmark slipped 1.1% after rallying more than 2% on Monday.

Traders are reacting to a late Friday statement by the State Council, which vowed to strengthen stock listing criteria and urged companies to improve corporate governance and beef up dividend payouts. The guidelines are encouraging investors to pivot toward bigger companies amid an uncertain economic outlook and earnings growth, analysts say. 

“We expect the large-cap outperformance over small ones to continue given the new capital-market reform measures that focus on profitability, dividend payout and shareholder return,” said Marvin Chen, an analyst with Bloomberg Intelligence. “Unprofitable and low-liquidity small caps may face increased delisting pressure under the new guidelines.”

Market watchers likened the Friday statement to measures released 2004 and 2014 on developing the capital market, which had then ushered in a round of market reforms.  

The latest guidelines came at a time when investors were reassessing the outlook for Chinese stocks following a rebound from a February low. Sentiment was weak Tuesday as data showed retail sales and industrial production lost momentum in March though economic growth beat expectations in the first quarter. 

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The CSI 2000 Index has now lost about 23% for the year, while the CSI 300 is up more than 2%.  

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