Chinese shares closed down 7.70 percent on Monday, the biggest fall in more than six years, after regulators cracked down on margin trading that has fuelled a market rally, analysts said.
The benchmark Shanghai Composite Index tumbled 260.15 points -- the biggest one-day decline since June 2008 -- to 3,116.35 on turnover of 409.9 billion yuan ($65.9 billion). It was down as much as 8.33 percent in intra-day trading.
The Shenzhen Composite Index, which tracks stocks on China`s second exchange, dropped 3.39 percent, or 50.10 points, to 1,428.37 on turnover of 276.2 billion yuan.
The China Securities Regulatory Commission (CSRC), the market regulator, said late Friday that it had suspended three brokerages from opening new margin trading customer accounts for three months after an inspection found rule violations.
Chinese stocks have been surging in recent weeks, triggered by an interest rate cut in November and driven by liquidity and margin trading -- investors using borrowed funds to trade on the markets with only a small portion of money put down as deposit.
The three named brokerages -- Citic Securities, Haitong Securities and Guotai Junan Securities -- are among the country`s biggest. They were found to have renewed expired margin trading and securities lending contracts, in violation of rules.
The regulator doled out lesser penalties to nine other brokerages for similar practices, including allowing unqualified customers to trade on margin.
"The CSRC`s punishment of the three brokerages for rule violations for margin trading business last Friday was a punch to the market," BOC International analyst Shen Jun told AFP.
The securities regulator might also want the market to ease back, following a more than 50 percent rise in the Shanghai index last year, he said.
"If the stock market continues to be red-hot, funds unleashed from monetary easing will flow into the market, so the regulator wants it to take a break."
Expectations of further monetary easing following the interest rate cut have boosted stock market sentiment. The Shanghai index rose 52.87 percent in 2014 and had gained more than four percent for the year-to-date by Friday.
Analysts said the impact from the regulatory move could impact the market for the rest of the week, but were unsure if the "bull market" was finished.
Investors are also waiting for Tuesday`s release of economic growth figures for 2014.
"At least the first round of rally is over," Zheshang Securities analyst Zhang Yanbing told AFP. "The regulator doesn`t want a surge in the market, it hopes to see healthy and steady development."