Chinese shares tumble 8.5 percent in biggest one-day drop since 2007

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Chinese shares slid more than 8 percent on Monday as an unprecedented government rescue plan to prop up valuations ran out of steam, throwing Beijing's efforts to stave off a deeper crash into doubt.

Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China's volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June.

"The lesson from China's last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect," wrote Capital Economics analysts in a research note reacting to the slide.

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Chinese shares tumble 8.5 percent in biggest one-day drop since 2007
A man walks past an electric board displaying stock prices at a brokerage house in Hangzhou in east China'sZhejiang province Monday July 27, 2015. The Shanghai share index dived more than 8 percent Monday as Chinese stocks suffered a renewed sell-off despite government efforts to calm the market.(Chinatopix via AP) 
An investor walks past a screen that shows share prices in a security firm in Hangzhou, east China's Zhejiang province on July 27, 2015. China's benchmark Shanghai stock index slumped 5.22 percent in afternoon trade on July 27, dragged lower by worries over the economy. AFP PHOTO CHINA OUT (Photo credit should read STR/AFP/Getty Images)
Investors monitor displays of stock information at a brokerage house in Beijing, Wednesday, July 15, 2015. Shanghai stocks lost ground on Wednesday despite China's better-than-expected economic growth in the second quarter, with investors still wary after a big slide in Chinese markets. (AP Photo/Mark Schiefelbein)
A trader talks on the phone at the Hong Kong Stock Exchange on July 9, 2015. Hong Kong shares ended the morning session 3.43 percent higher July 9, rebounding from a recent plunge and tracking gains in China after Beijing beefed up measures to stop a mainland rout. AFP PHOTO / ISAAC LAWRENCE (Photo credit should read Isaac Lawrence/AFP/Getty Images)
An investor rests on his arm before a screen that shows share prices in a security firm in Hangzhou, east China's Zhejiang province on July 27, 2015. China's benchmark Shanghai stock index slumped 5.22 percent in afternoon trade on July 27, dragged lower by worries over the economy. AFP PHOTO CHINA OUT (Photo credit should read STR/AFP/Getty Images)
An investor uses a computer terminal to check stock information at a brokerage house in Beijing, Wednesday, July 15, 2015. Shanghai stocks lost ground on Wednesday despite China's better-than-expected economic growth in the second quarter, with investors still wary after a big slide in Chinese markets. (AP Photo/Mark Schiefelbein)
Investors monitor displays of stock information at a brokerage house in Beijing, Wednesday, July 15, 2015. Shanghai stocks lost ground on Wednesday despite China's better-than-expected economic growth in the second quarter, with investors still wary after a big slide in Chinese markets. (AP Photo/Mark Schiefelbein)
A screen that shows the Shanghai Composite Index (top) and the Shenzhen Component Index is seen on the side of an overpass in front of the Oriental Pearl Tower (back) in Shanghai on July 9, 2015. Chinese stocks stormed into positive territory in volatile trading on July 9 as Beijing launched new measures to halt a dramatic sell-off, but trading remained volatile in a crisis that has also hurt global share markets and commodity prices. AFP PHOTO CHINA OUT (Photo credit should read STR/AFP/Getty Images)
FILE - In this Thursday, July 9, 2015, file photo, a Chinese stock investor uses a magnifying glass to look at his mobile phone screen as he monitors stock prices at a brokerage in Beijing, China. Asian stock markets continued to react on Thursday as the Chinese government took measures aimed at stabilizing the market. (AP Photo/Ng Han Guan)
An investor rests her head in her hand as she sits in front of a display of stock information at a brokerage house in Beijing, Wednesday, July 15, 2015. Shanghai stocks lost ground on Wednesday despite China's better-than-expected economic growth in the second quarter, with investors still wary after a big slide in Chinese markets. (AP Photo/Mark Schiefelbein)
An investor looks at his smart phone displaying stock prices at a brokerage in Beijing Tuesday, July 14, 2015. The Shanghai Composite Index still is down more than 20 percent from its June 12 peak. State-owned brokerages and government pension funds have pledged to buy stocks, and executives and big shareholders are barred from selling. (AP Photo/Ng Han Guan)
Investors look at screens showing stock market movements at a securities company in Beijing on July 16, 2015. Chinese shares ended higher on July 16 in volatile trading, rebounding from sharp falls the previous day, dealers said. AFP PHOTO / FRED DUFOUR (Photo credit should read FRED DUFOUR/AFP/Getty Images)
A man checks on stock prices at a brokerage house in Beijing Monday, July 13, 2015. Chinese authorities have accused securities firms of manipulating share prices and allowing improper trading during the country's market plunge, in a possible effort to deflect blame for investor losses totaling several trillion dollars. (AP Photo/Andy Wong)
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The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen tumbled 8.6 percent to 3,818.73 points, while the Shanghai Composite Index .SSEC lost 8.5 percent to 3,725.56 points.

China's market gyrations have stoked fears among global investors about the broader health of the world's second biggest economy, hitting prices of growth-sensitive commodities such as copper, which fell on Monday to not far from a 6-year low. [MET/L]

But, while the recent stock market weakness will have caught out many retail investors and companies who jumped in as stocks more than doubled in a year, the low rate of stock ownership by households and a disconnect between valuations and economic fundamentals mean the impact on the economy is likely to be less than in other markets.

FUTURES TUMBLE

Stocks fell across the board on Monday, with 2,247 companies falling, leaving only 77 gainers.

More than 1,500 shares listed in Shanghai and Shenzhen dived by their 10 percent daily limit, led by index heavyweights including China Unicom (600050.SS), Bank of Communications (601328.SS) and PetroChina (600028.SS).

All traded index futures contracts also fell by their maximum 10 percent limit, with the exception of a few tracking the large cap SSE50 index, which declined around 9 percent.

Some analysts said talk had circulated among traders that the China Securities Financial Corporation (CSFC) had returned ahead of schedule some of the loans it took to stabilize the stock market, highlighting investor concern that Beijing's commitment to supporting prices may be flagging.

The CSFC became the regulator's weapon of choice earlier this month, borrowing money from commercial banks to buy shares in Chinese stocks. That helped indexes jump around 20 percent from their recent low, until Monday's renewed decline.

The CSFC did not respond to calls requesting comment.

Monday's fall accelerated sharply in the afternoon, long after investors had digested lackluster data on profits at Chinese industrial firms and a disappointing private factory sector survey on Friday.

But Chinese stock investors have been celebrating bad economic news for months on the basis it would provoke more aggressive policy easing, seen as positive for stocks because it pushes cheap money into the market.

Some saw the government-induced recovery in share prices in recent weeks as itself contributing to the crash.

"After two weeks of steady rebound, both foreign investors and domestic institutions are gradually taking profits, increasing selling pressure," said Yu Jun, strategist at Bosera Asset Management Co.

"In addition, investor confidence hasn't fully recovered. There has been no obvious increase in outstanding margin loans, while the amount of fresh capital inflows is much lower than the average level in May and June. With not enough money taking up the baton, a renewed, sharp correction is inevitable."

CONFIDENCE GAME

China's main stock indexes had more than doubled over the year to mid-June, when a sudden swoon saw shares lose more than 30 percent of their value in a matter of weeks.

Markets finally began stabilizing again in the second week of July, due mostly to Beijing's effort to pump liquidity into the market while barring investors from selling.

China's central bank cut interest rates, brokerages formed stabilization funds and regulators lifted restrictions on pensions and insurers investing in stocks, an implied combined total verbal commitment of almost $800 billion.

Beijing also cracked down on "malicious" short-sellers in the futures market, froze IPOs to prevent a liquidity drain and looked the other way as around 40 percent of companies suspended trading in their shares to escape the rout.

The campaign even acquired nationalistic tones at times, with local governments calling on retail investors to "defend the stock market," and domestic media and popular commentators expressing suspicions that the crash was engineered by a foreign cabal.

(Additional reporting by Hong Kong newsroom; Editing by Alex Richardson, Richard Borsuk and Ian Geoghegan)

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