Financial shares led Chinese equities lower on Monday as tighter futures-trading rules and supportive comments by China's central bank governor failed to stem afternoon selling pressure on the first trading day since Wednesday.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 3.4 per cent to 3,250.49, while the Shanghai Composite Index lost 2.5 per cent to 3,080.42 points.
Equities rallied in the morning, which analysts linked to regulators' move to further restrict futures trading, announced late Wednesday before a two-day holiday break. Authorities have blamed recent equity market declines in part on shorting in the futures market.
Stocks also appeared to be boosted early by Saturday comments by Zhou Xiaochuan, the governor of China's central bank, speculating that the stock correction was nearing its end.
At one point Monday morning, the CSI300 September futures contract hit the limit up of 10 per cent. At the day's end, it was up 2.2 per cent.
"The big rise in the futures this morning was definitely related to the new rules," said Zhang Qi, an analyst at Haitong Securities in Shanghai. "It's now even more difficult to take short positions."
On Monday, the first day the trading rules took effect, Chinese futures volumes dropped dramatically. Compared with September 2, they were down 93 per cent for the September contract and 76 per cent for the October contract.
"Today China's futures index died," Yang Tao, an influential investment commentator, wrote on Monday morning on Weibo, China's popular microblogging service.
Dramatic fall in volume
Futures volume "has receded dramatically. After today, stock market movements will no longer have any meaningful relation with the futures indices'', he said.
In the afternoon, stocks gave up their morning gains and kept dropping.
"The falls this afternoon may be a matter of investors deciding that the morning reaction was simply overdone and taking profits," said Zhang of Haitong Securities.
"The market seems to have its own internal logic these days."
Among the most active stocks in Shanghai were ICBC, down 8.9 per cent at 4.51 yuan; Agricultural Bank of China, down 7.4 per cent at 3.12 yuan and China Shipbuilding, down 5.6 per cent at 10.74 yuan.
In Shenzhen, BOE Technology, down 0.3 per cent at 3.13 yuan; Suning Appliance, up 5.0 per cent at 14.00 yuan and HEBEI STEEL, down 3.6 per cent at 4.02 yuan were among the most actively traded.
Total volume of A shares traded in Shanghai was 29.6 billion shares, while Shenzhen volume was 22.8 billion shares.