The Shanghai share index suffered a renewed sell-off despite government efforts to calm the market, ending down 8.5 per cent at 3,725.56 with most of the plunge occurring in the last hour of trading. Other stock benchmarks around the world were also lower.
By mid-morning the TSX was down 0.8 per cent to 14,070, its lowest level this year. The New York Stock Exchange performed similarly, with the Dow Jones Industrial Average down 82 points at opening to 17,487. The Nasdaq Composite Index was down 41 points, of 0.8 per cent, to 5,047.
Monday's fall on the Shanghai market was the biggest one-day decline in Chinese stocks since an 8.8 per cent plunge on Feb. 27, 2007, according to financial data provider FactSet.
About 1,700 stocks fell the maximum 10 per cent allowable in any day, including China Life Insurance, Shenhua Energy and Bank of Communications.
Chinese stock prices are still 75 per cent higher than they were last year and up 15 per cent since January. Today's plunge follows a steep runup in stock prices encouraged by China's leadership, which was predicting new heights for shares despite signs of a slowing economy.
30% fall in June
In June, the Shanghai market fell by 30 per cent as investors began to see lower corporate profits. Many small retail investors were hurt by the rout.
But Beijing stepped in to try to bolster the market, relaxing rules on insider trading, banning short selling and encouraging state-owned firms to invest heavily. Shanghai's stock index bounced upward again.
There were reports Monday that brokerages, who have been extended credit during the crisis, have begun restricting margin trading. Analysts are saying Beijing's efforts cannot continue to boost share prices.
That sparked panic selling, especially among China's neophyte retail investors.
"The continuous check on margin trading by security companies has triggered today's sell-off," said Xu Xiaoyu, a market strategist at China Investment Securities. "In addition, the recent economic data shows it still takes time for the economy to recover from its sluggishness."
Warning from IMF
In private talks, the IMF has told China's leadership it should not be intervening in the stock market and should let market forces dictate the direction of the market. However today's drop will lead to renewed pressure on Beijing to intervene.
The Chinese sell-off rattled other markets in Asia. Hong Kong's Hang Seng shed 3.1 per cent at 24,288.54 and Japan's Nikkei 225 dropped 1 per cent to 20,350.10. South Korea's Kospi fell 0.4 per cent to close at 2,038.81. Stocks in Southeast Asia were lower. But Australia's S&P/ASX 200 gained 0.4 per cent to 5,589.90.
Asian stocks had already started the week on a dour note, rattled by a last week's report on Chinese manufacturing that showed a contraction in output. That sparked a sell-off in gold as well as copper and other commodities, a trend that will weigh on Canada's resource-heavy stocks.
The National Bureau of Statistics reported this week that China's industrial profits contracted 0.3 per cent in June over a year earlier, marking a second straight month of decline. That could indicate that the economy has slowed more than China's leadership have anticipated.