China's stock market saw a further slump on Monday despite the central bank's move over the weekend to cut interest rates, but the securities authority said the drop was simply an "adjustment" after the recent bull run.
Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission (CSRC), said late Monday that turnover was still strong despite the recent drop. But he noted that too big a drop could hurt market stability.
He also said margin trading at securities firms was at a stable level and that the risks are controllable.
The benchmark Shanghai Composite Index plunged by as much as 7.54 percent in afternoon trading before closing down 3.34 percent at 4,053.03 points. The smaller Shenzhen Component Index slumped by 7.97 percent during the afternoon, closing down 5.78 percent at 13,566.27 points.
Over 1,500 stocks fell by the daily limit of 10 percent, while 214 stocks, mainly from the banking and insurance sectors, saw a rise.
"The dramatic fall will add to worries among jittery investors, who have already suffered two weeks of dismal performance by China's frothy stock market," Xu Gao, chief economist with China Everbright Securities Co, told the Global Times Monday.
China's A-share market experienced its biggest one-day drop in seven years on Friday, with the Shanghai Composite Index dropping by 7.4 percent and the Shenzhen Component Index falling by 8.24 percent.
On Saturday, the People's Bank of China (PBC), the central bank, announced a cut in both interest rates and banks' reserve requirement ratio, which Xu said was aimed at calming fears among investors.
Analysts attributed the recent fall to panic selling as a result of a decision by the country's top securities watchdog to tighten controls on margin trading, a fast-expanding mode of securities lending that has been a major factor in the bull run in China's stock market this year.
In April, the CSRC said at a regular press conference that it had imposed a ban on the opening of new margin trading accounts and had required securities firms to increase internal compliance checks.
Margin trading enables individuals and companies to invest using borrowed money, which is an innately risky practice.
The total value of margin finance in the A-share market reached 2.13 trillion yuan ($343 million) by the close on Friday, nearly three times the level in November, when China's stock market rally started, according to data from domestic stock market information provider eastmoney.com.
"The Chinese authorities will continue tightening their controls on margin-trading, in order to squeeze bubbles out of the stock market," said Xu.
China Securities Finance Corp, a State-run margin financing provider, has said that currently the risks from margin trading are controllable. This comment was posted by the CSRC on its official Weibo account soon after the plunge on Monday, a move that analysts also said was aimed at easing fears and curbing panic selling.
Following the posting by the CSRC, there were signs of a recovery in the market, after steep drops earlier in the afternoon.
Zhang from the CSRC noted that a stable stock market is crucial for overall economic growth and the market will see further reforms.
To support the stock market, approval will probably be given for the pension fund to be invested in the market, the Ministry of Finance said Monday.
"When the market is within a whisker of bear market territory, the quota for new IPOs should be reduced," Li Daxiao, chief economist with Shenzhen-based Yingda Securities Co, told the Global Times Monday.
He noted that the launch of new IPOs can generate pressure on market liquidity.
An unidentified source was quoted by Bloomberg on Monday as saying that the CSRC is considering suspending new IPOs to stabilize the stock market. CSRC officials did not reply to a request for comment by the Global Times by press time.
Both Xu and Li believe that the current adjustment is a natural correction, and it could lead to a more sound and rational stock market that relies more on fundamentals than on sentiment.
Despite the recent slump, the Shanghai Composite Index is still up more than 24 percent year-to-date, and the Shenzhen Component Index was up 22 percent by close of trade Monday, putting them among the world's top-performing indexes.
