Chinese stocks suffered a sharp decline on Tuesday after authorities said rumors of mergers and acquisitions of state-owned enterprises (SOEs) were "unverified".
The benchmark Shanghai Composite Index dropped 1.13 percent to finish at 4,476.22 points, and the Shenzhen Component Index lost 0.69 percent to close at 14,707.25 points.
The ChiNext Index, the Nasdaq-style board that tracks growth enterprises, declined 2.17 percent to end at 2,687.97 points.
Shares in oil; media and entertainment; furniture; and aircraft dipped substantially.
Media reports about possible SOE consolidation went viral Monday and propelled key stock indices to fresh highs.
"The story was written without interviewing or verifying with us," the State-owned Assets Supervision and Administration Commission said in a brief statement, without elaborating.
The equity market has seen bullish performance since last October, with the benchmark Shanghai Composite Index almost doubling in the past seven months.
Xiao Gang, head of the China Securities Regulatory Commission (CSRC), attributed the skyrocketing market mainly to continuous reform measures, which, he believed, stabilized market expectation and boosted investors' confidence.
Wu Xiaoqiu, a finance professor at Renmin University of China, echoed Xiao, but he also expressed fear of rising speculation in the market, citing the substantial daily turnover on the two stock exchanges.
Combined turnover amounted to 1.7 trillion yuan (276.9 billion U.S. dollars) on Tuesday, up from Monday's 1.6 trillion yuan. Turnover on the Shanghai Stock Exchange topped one trillion yuan for the second time this month.
Hu Zuliu, chairman of investment firm Primavera Capital Group, said Chinese shares were partly boosted by policy incentives like monetary easing, and it was not sustainable.
For many companies, stock prices have little to do with their financial performance, but rather so-called "insider information". Some stocks rose steeply in a very short time and surpassed their true value.
However, investors, especially small ones, suffer from the sharp decline should such information be proven wrong or institutional investors suddenly sell stocks to cash in.
Despite repeated CSRC warnings that stock trading is risky, Chinese investors are flocking to the equity market for quick returns, with new trading accounts soaring by 433 percent year on year in the first quarter to reach almost 8 million.
Ha Jiming, chief investment strategist for the investment management division of China at Goldman Sachs, said stocks were one of few ways left for investors to make money as the lackluster real economy provides few opportunities.
For a healthy stock market with long prosperity, Hu said the government should continue to deepen reform and public companies should try to improve their profitability.
"These are the fundamentals of a sound market," he said.
