Shanghai stocks plunged 8.5% Monday, erasing most of the government-engineered gains of the past three weeks.
A government report Monday that industrial profits in June had dropped 0.3 percentage points from the year before, a Bank of America Merrill Lynch estimate that outstanding margin balances remain in excess of 3 trillion renminbi ($489.9 billion) and little evidence of government buying support were cited by market participants as possible triggers for the market's plunge, the bulk of which occurred in the afternoon session.
The Shenzhen composite, meanwhile, plummeted 7% Monday to close at 2,160.09.
In other market action in Asia Monday, Japan's Nikkei 225 index fell 0.95%; Hong Kong's Hang Seng index tumbled 3.1% and Singapore's Straits Times benchmark dropped 1.17%. But Australia's S&P/ASX edged up 0.43% while South Korea's KOPSI rose 0.59%.
The Shanghai Stock Exchange composite index ended the day at 3,725.56, down 345.35 points from the July 24 close but still 6.2% above the recent low of 3,507.19 on July 8.
Between the Shanghai composite's closing high of 5,166.35 on June 12 and July 8, the market had dropped more than 32%, after surging roughly 150% over the prior year. Unlike previous rallies, this one had been fueled, in part, by heavy margin borrowing.
The sell-off from mid-June clearly rattled the government, which announced a flurry of measures, including closing the IPO market, forbidding major stockholders to sell their shares and prompting big institutional investors to buy.
Market participants said it's unclear whether Monday's renewed sell-off reflected a lull in government support or a reappraisal of whether intervening extensively in the market was advisable. A number of foreign portfolio managers had predicted the government's direct intervention in buying and selling activities would set back the timing of goals the government has wanted to achieve, such as getting A shares added to global emerging markets benchmark indexes.
The Chinese government already has shown to the market that they will step up and intervene, but obviously the magnitude needs to be much bigger in order to drive out the speculators, noted Kenneth Wong, a Hong Kong-based China portfolio specialist with Eastspring Investments.
In the meantime, the sell-off will again provide opportunities to investors, said Mr. Wong, although Eastspring continues to see more to like in the Hong Kong-listed H-shares market.