PANIC selling and margin calls greeted China investors back from the weekend on Monday.
Fuelled by dismal economic data, bears wiped 8.5 per cent off the Shanghai Composite in just one day - its biggest daily percentage loss in eight years and the second largest on record.
The rout saw 75 losers for every gainer and put paid to a three-week rally, with more than 1,700 stocks tumbling by the daily limit of 10 per cent.
The sharp sell-down to 3,725.558 points revealed how fragile the Chinese stock market is at the moment, analysts said, adding that it signalled ebbing confidence in the Chinese government's ability to keep propping up the country's stock markets.
It also took down other regional markets. Hong Kong's Hang Seng dropped 3.1 per cent while the Straits Times Index shed 1.2 per cent.
The plunge on Monday, which occurred despite a month of government efforts to soothe market jitters, was probably due to a nasty confluence of negatives, analysts said, noting that investors fear that some stabilisation measures would be taken away as the world's No 2 economy slows down.
"The primary driver were rumours that the authorities may quickly withdraw the support measures, owing to pressure from the International Monetary Fund," said IG strategist Bernard Aw.
Wendy Liu, Nomura's head of China equity research, also said that the plunge was probably triggered in part by "what is viewed by many in the A-share market as premature discussion of the exit of the stabilisation fund, before the market has stabilised". "While valuation is not demanding, confidence is still feeble."
Analysts added that the market correction was likely to have yet run its course. CMC market strategist Nicholas Teo said that the margin unwinding that originally caused the bubble to burst is still going on but the government, though strong, seems to be reluctant to show its full hand. "China has not reached its limit yet, but they also don't want to represent that they're desperate and throw in the kitchen sink."
Weak Chinese data also dented sentiment. Phillip Futures senior dealer Lee Choong Kit pointed out that the Shanghai market's 2.45 per cent fall before noon on Monday followed a drop in China's industrial profits, while the preliminary Caixin China Manufacturing PMI also fell to a low of 48.2 last Friday, sparking fears that the economy could stall.
A backdrop of heightened expectations of an interest rate hike in the United States later this year plus a commodity slump also took the wind out of Shanghai's sails, analysts added.