Chinese shares slid more than 8 percent on Monday as an unprecedented government rescue plan to prop up valuations ran out of steam, throwing Beijing's efforts to stave off a deeper crash into doubt.
Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China's volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June.
"The lesson from China's last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect," wrote Capital Economics analysts in a research note reacting to the slide.
The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen tumbled 8.6 percent to 3,818.73 points, while the Shanghai Composite Index .SSEC lost 8.5 percent to 3,725.56 points.
China's market gyrations have stoked fears among global investors about the broader health of the world's second biggest economy, hitting prices of growth-sensitive commodities such as copper, which fell on Monday to not far from a 6-year low. [MET/L]
But, while the recent stock market weakness will have caught out many retail investors and companies who jumped in as stocks more than doubled in a year, the low rate of stock ownership by households and a disconnect between valuations and economic fundamentals mean the impact on the economy is likely to be less than in other markets.
Stocks fell across the board on Monday, with 2,247 companies falling, leaving only 77 gainers.
More than 1,500 shares listed in Shanghai and Shenzhen dived by their 10 percent daily limit, led by index heavyweights including China Unicom (600050.SS), Bank of Communications (601328.SS) and PetroChina (600028.SS).
All traded index futures contracts also fell by their maximum 10 percent limit, with the exception of a few tracking the large cap SSE50 index, which declined around 9 percent.
Some analysts said talk had circulated among traders that the China Securities Financial Corporation (CSFC) had returned ahead of schedule some of the loans it took to stabilize the stock market, highlighting investor concern that Beijing's commitment to supporting prices may be flagging.
The CSFC became the regulator's weapon of choice earlier this month, borrowing money from commercial banks to buy shares in Chinese stocks. That helped indexes jump around 20 percent from their recent low, until Monday's renewed decline.
The CSFC did not respond to calls requesting comment.
Monday's fall accelerated sharply in the afternoon, long after investors had digested lackluster data on profits at Chinese industrial firms and a disappointing private factory sector survey on Friday.
But Chinese stock investors have been celebrating bad economic news for months on the basis it would provoke more aggressive policy easing, seen as positive for stocks because it pushes cheap money into the market.
Some saw the government-induced recovery in share prices in recent weeks as itself contributing to the crash.
"After two weeks of steady rebound, both foreign investors and domestic institutions are gradually taking profits, increasing selling pressure," said Yu Jun, strategist at Bosera Asset Management Co.
"In addition, investor confidence hasn't fully recovered. There has been no obvious increase in outstanding margin loans, while the amount of fresh capital inflows is much lower than the average level in May and June. With not enough money taking up the baton, a renewed, sharp correction is inevitable."
China's main stock indexes had more than doubled over the year to mid-June, when a sudden swoon saw shares lose more than 30 percent of their value in a matter of weeks.
Markets finally began stabilizing again in the second week of July, due mostly to Beijing's effort to pump liquidity into the market while barring investors from selling.
China's central bank cut interest rates, brokerages formed stabilization funds and regulators lifted restrictions on pensions and insurers investing in stocks, an implied combined total verbal commitment of almost $800 billion.
Beijing also cracked down on "malicious" short-sellers in the futures market, froze IPOs to prevent a liquidity drain and looked the other way as around 40 percent of companies suspended trading in their shares to escape the rout.
The campaign even acquired nationalistic tones at times, with local governments calling on retail investors to "defend the stock market," and domestic media and popular commentators expressing suspicions that the crash was engineered by a foreign cabal.
(Additional reporting by Hong Kong newsroom; Editing by Alex Richardson, Richard Borsuk and Ian Geoghegan)