Shanghai Composite Index suffers alarming 8.5 percent drop, Chinese stocks tizzy

Stocks on mainland China continue to remain in a state of confusion in the wake of the Shanghai Composite Index alarmingly dropping by 8.5 percent on Monday.

Monday's plunge was viewed as surprising because it followed a government rescue package that had helped drive a 16 per cent rally since July 8. That support appeared to vanish without warning, leaving analysts guessing whether the authorities have shifted their policy stance or just got overwhelmed by a flood of sell orders, reports the Strait Times.

Experts said that by and large the markets in China are distorted, so you can't sell short very confidently and you can't buy up very confidently either.

Signs of government purchases that were prevalent in recent weeks went missing in Monday's rout.

PetroChina Co., long considered a favorite holding of state-linked rescue funds, sank 9.6 per cent.

China Securities Finance Corp., a state-backed agency that provides margin financing and liquidity, hasn't withdrawn support for equities, China Securities Regulatory Commission spokesman Zhang Xiaojun said in a statement Monday.

The commission will "continue efforts to stabilize market and investor sentiment, and prevent systemic risk," he said.

The China 50 ETF, another target of government funds, dropped 9.1 per cent Monday.

The Shanghai Composite's one-day selloff was the broadest since at least 1997, with 959 more shares in the index falling than those that gained.

The Shanghai Composite dropped 1.8 per cent at 9:45 a.m. local time on Tuesday.