Shanghai: China stocks tumbled more than one per cent on Monday in their worst day in four months amid signs that Beijing will tolerate further market volatility as regulators clamp down on shadow banking and speculative trading.
Traders also said market confidence has been hit by an accelerated pace of initial public offerings which are pumping more supply into the weakening market, and by worries that the world's second-largest economy will start to lose momentum in coming months.
Recent signs of stability in China's economy "have provided a good external environment and a window of opportunity to reduce leverage in the financial system, strengthen supervision and ward off risks," the official Xinhua News Agency reported on Sunday.
"Over the past week, interbank rates trended higher, bond and capital markets suffered from sustained corrections and some institutions faced liquidity pressure. But these have little impact to the stability of the broader environment."
Chinese stocks have been on a downward trajectory since mid-April.
The Shanghai Composite Index slumped 1.4 per cent to 3,129.53 points, after posting its biggest weekly loss so far this year last week.
The blue-chip CSI300 index fell 1.0 per cent to 3,431.26 points.
Daily declines of more than 1 per cent in the indexes have been rare for notoriously volatile Chinese markets this year, though some highly speculative small cap shares have seen wild swings.
"Even the better-than-expected Q1 data could not boost the market, as investors are concerned about regulatory risks," wrote Larry Hu, an analyst at Macquarie Capital Ltd, referring to stronger-than-expected 6.9 per cent economic growth early in the year.
He added that "the last thing policy makers want to see amid the Party Congress this fall is a market crash like that in summer 2015. And the outstanding economic performance in Q1 gives them more room to tighten."
In the latest of a flurry of regulatory measures in recent weeks, China's insurance regulator said on Sunday it will ramp up its supervision of insurance companies to make sure they comply with tighter risk controls.
It also threatened to investigate executives who flout rules aimed at rooting out risk-taking.
The banking regulator said late on Friday that growth in Chinese wealth management products (WMPs) and interbank liabilities eased in the first quarter, suggesting authorities are making some headway in containing financial risks built up by years of debt-fuelled stimulus.
But while the clampdown is expected to continue, most analysts believe the moves will be cautious to avoid hitting economic growth, and some sceptics believe authorities will continue to put off more painful reforms.
Investors are already concerned that the economy could lose momentum as local governments launch ever more stringent measures in a battle to cool heated property prices.
"Market risk appetite could continue to decline if financial regulation keeps tightening," said Gao Ting, Head of China Strategy at UBS Securities.
"Investors seem to mostly be responding by adjusting their positions, particularly by rotating into high-quality blue-chips."
Another big concern for investors has been the pace of new IPOs.
Up to 500 IPOs are expected to be approved to raise no more than 300 billion yuan ($43.57 billion) in 2017, an official with Shanghai Stock Exchange was quoted as saying.
Dozens of newly-listed stocks had lost more than 30 per cent over the past weeks amid tougher regulation and expectations of more equity supply.
Main sectors fell across the board, led by infrastructure stocks, which dived more than 3 per cent.
Bearish sentiment spread to major investment themes, including the China-to-Europe "One Belt, One Road" infrastructure project and the high-profile new Xiongan Economic Zone near Beijing.