Chinese shares tumbled by over 6.74 percent yesterday as the market barometer plunged to a new three-month low and recorded its biggest daily drop in 14 months.
The benchmark Shanghai Composite Index lost 192.94 points to close at 2667.74 points, while the Shenzhen Component Index dropped 7.55 percent to 10585.08 points.
The leading indicator has fallen nearly 21.8 percent in August, the second-biggest monthly decline in 15 years, after seven straight monthly gains, as the curbs on lending and the new share supplies compounded the drop in liquidity
Losing shares on both bourses outnumbered gainers by 1,641 to 53 yesterday, while the combined turnover was 188.8 billion yuan ($27.6 billion) in thin trade from Friday's 213.6 billion yuan due to shortage of buyers.
"We believe that the plunge since early August, after the 103 percent gain since late 2008, was triggered by excessive fears of aggressive policy tightening, while the fundamentals remain intact," said Qian Wang, JP Morgan's China economist, but added that the implication for the real economy is modest.
The market rally had earlier been partly driven by the ample liquidity generated by surge of new loans and the interim earnings reports that have beaten analyst's estimates.
The average growth in net profit of the over 1,630 publicly traded firms in China was 36.1 percent in the second quarter from a quarter earlier, indicating a recovering economy.
"I did not expect equities to plunge as most of the companies have come out with string earnings numbers," said 61-year-old retiree Liu Fengming, with a perplexed look on her face.
Liu, who has put over tens of thousands of yuan from her own savings in the stock market since 2001, said she would hold the money and wait. "I am confident that the market would stabilize after yesterday's carnage, but nobody is willing to take risks by testing the waters at this point."
Marketmen, however, feel that it may take some time for the confidence to recover due to the absence of any positive triggers, said Yao Rong, a fund manager at Shenzhen-based Dacheng Fund Management Co Ltd.
But Yao added that share prices would now come to realistic levels and hence would be an ideal time for funds to increase their portfolio holdings.
PetroChina, the world's most valuable company, sank to its daily limit of 10 percent at 11.13 yuan, after reports that the government plans to cut the number of times it would adjust fuel prices.
Baoshan Iron & Steel Co, the country's largest steel producer, fell 6.96 percent to 6.42 yuan after its first-half profit sank 93 percent.
China Merchants Bank lost 6.26 percent to close at 13.63 yuan after it said it was hiking its rights offer by 22 percent to raise 22 billion yuan.
"With the government committed to rein in cash flows, the major index may fall below 2,500 points soon," said Ren Chengde, analyst, China Galaxy Securities.