Chinese shares have slumped more than five percent, suffering their biggest daily loss since the financial crisis in 2008. The selloff has come as investors fear a banking liquidity crisis caused by China's central bank.
On Monday, China's benchmark Shanghai Composite Index lost up to 5.48 percent in afternoon trading, ending 5.3 percent, or 109 points, lower.
The CSI300 index of leading Shanghai and Shenzhen A-share listings ended down 6.3 percent, while Shanghai's sub-index of financial shares plummeted 7.3 percent in its worst single-day loss since November 2008.
The massive selloff in China's stock markets was prompted by fears of a liquidity crunch in the banking sector, which already last week saw interbank lending rates jump to a record 13 percent as lending among the country's banks became virtually frozen.
Those fears were fuelled on Monday by comments from the central bank, the People's Bank of China (PBoC), which described liquidity in the financial system as reasonable, refusing to provide more funding to the banking sector.
Calling spikes in the money market distortions caused by speculative trading and shadow financing, the PBoC urged financial institutions to continue to strengthen their liquidity management and promote a stable monetary environment.
In a sign that Beijing would continue to reject more cash for banks, the state-owned Xinhua news agency claimed that there was no shortage of funds, adding that it was just that the funds were placed in wrong areas.
China's Communist rulers have opted for restrictive monetary policy, fearing that excessive credit, often provided by China's huge shadow banking sector, might lead to bad investments that could upset the country's long-term growth prospects.
However, the policy is causing mounting concern for China's short-term growth after the economy expanded only 7.8 percent in 2012, its slowest pace in 13 years, and posted a weak 7.7 percent expansion in the first quarter of this year.
uhe/dr (AFP, Reuters, dpa)