China stock market in turmoil as indices plunge

China's falling stock market showed signs of deep distress today, as companies scrambled to escape rout by suspending their shares as indexes plunged after the securities regulator warned of "panic sentiment" taking hold over investors.

Beijing, which had struggled for over a week to bend the market to its will, lined up yet more  measures to stanch the haemorrhage, and the People's Bank of China said it would increase support to brokerages enlisted to prop up shares.

The CSI300 of the largest listed companies in Shanghai and Shenzhen closed down 6.8 per cent, even as the Shanghai Composite Index .SSEC slid 5.9 per cent.

"I've never seen this kind of slump before. I don't think anyone has. Liquidity is totally depleted," said Du Changchun, an analyst at Northeast Securities, Reuters reported.

"Originally, many wanted to hold blue chips. But since so many small caps are suspended from trading, the only way to reduce risk exposure is to sell blue chips."

With over 30 per cent having been knocked off the value of Chinese shares since mid-June, some global investors feared, that the prospect of China's market turmoil destabilising the real economy was now a bigger risk than the crisis in Greece.

"Also, the ripple effect from the market correction has yet to show up," wrote Bank of America Merrill Lynch analysts in a note. "We expect slower growth, poorer corporate earnings, and a higher risk of a financial crisis."

Meanwhile, the Shanghai benchmark was down over 30 per cent since peaking 12 June following a sizzling year-long rally. Millions of novice investors had rushed in when the market was at its most upbeat and while some made big profits, the slump had left many with shares worth less than they paid and hoping for a rebound so they could sell.

According to commentators, the rout was being driven by the unwinding of margin debt used to buy shares by retail investors in China, who comprised over 80 per cent of the nation's share owners.

However, Beijing's efforts to manage the downturn in the market were looking like panic, leaving some analysts wondering if the risk was starting to spread beyond China's small shareholder class.

Society General's brokerage arm said in a research note to clients, "As one of the key measures, nearly all the big non-bank financial institutions are called to increase their investment in the market and one of them, China Securities Finance Corporation, is granted the access to the PBoC's liquidity support.

"We think that the rescue plan could potentially increase the systemic risk down the road. Initially most of the stock market risk was with households, but with the rescue plan, systemically important institutions are taking up more risk when the market is still under immense downward pressure. Our biggest concern is that the progress of structural reform could suffer.