Shanghai stocks plunge 6.42% by close

Chinese shares slumped more than six percent Friday afternoon as tight market liquidity caused by new share issues triggered a large sell-off, dealers said.

The benchmark Shanghai Composite Index dived 6.42 percent, or 307.00 points, to 4,478.36 on turnover of 685.5 billion yuan ($112.2 billion). The index lost 13.32 percent over the week.

The market loss was the worst since May 28, when Shanghai dived 6.50 percent.

The Shenzhen Composite Index, which tracks stocks on China’s second exchange, sank 5.88 percent, or 171.42 points, to 2,742.18 on turnover of 601.2 billion yuan. It fell 12.69 percent for the week.

China's market regulator last week tightened some rules for margin trading, through which investors borrow funds to trade stocks, and prohibited dealers from raising funds outside of the margin trading channel to trade stocks.

"China stocks’ correction is mainly triggered by concern about high valuations of smaller companies and the regulator's crackdown on margin debts, particularly non-compliant ones," Zhang Haitong, Shanghai-based chief strategist at Jinkuang Investment Management, told Bloomberg News.

"We may be close to the end of the correction as the tone of loose monetary policies isn't changed. We may see cuts in interest rates or reserve requirement ratios again as the economy is still sluggish," Zhang said.

The Shanghai market has paired last week’s gains as investors grew cautious after it hit the 5,000-point level earlier in June.

A total of 11 companies issued new shares for investor subscription, which usually drains funds away from the existing market. The regulator approved 24 initial public offerings earlier this month.

"The new share offers are part of the direct causes for the market selloff today and it is very likely this is a mid-term market adjustment," Haitong Securities analyst Zhang Qi told AFP.