China shares slide as banks investigate their market exposure

CSI300 index declines 2.9%, Shanghai Composite Index down 2.2%,

China shares fell again on Thursday after a report that banks were trying to get to grips with their financial exposure to the stock market slump in June added to a pall of uncertainty for investors.

Concerns about the level of borrowing to fund market positions have been magnified by the grey market - a loosely regulated network of state-owned commercial banks, trust companies, fund managers, and grassroots finance firms.

If banks decide to rein in their exposure to the stock market, it could squeeze a line of credit for potential buyers and so undermine confidence in a price recovery.

The benchmark CSI300 index of the largest listed companies in Shanghai and Shenzhen closed down 2.9%, while the Shanghai Composite Index closed down 2.2%.

Still, the performances were relatively calm compared with Monday, when stocks dropped more than 8% for their biggest one-day drop since 2007. Analysts have struggled to identify a single clear reason for the day's tumble.

Chinese authorities have scrambled to steady the country's roller coaster stock markets this year. Share prices more than doubled in the six months to May, before crashing in June by more than a third.

Marshall Mays, director of Emerging Alpha Advisors, a fund management company in Hong Kong, said he expected Beijing to adopt a "whatever it takes" policy to underpin the stock markets.

"The CCP can not allow prices to collapse," he said, referring to the Communist Party.

Citing unidentified bank officials, the China Securities Journal said on Thursday that Chinese banks had been checking their exposure to the stock market via wealth management products and loans collateralised with shares.

Banks have been a major source of lending to the grey market for stock investors but the pace of the fall in June may have put their money at risk, analysts said.

Monday's shock drop jolted markets and traders said many investors are now waiting on the sidelines to see if prices stabilise before they will buy shares again. The exact reason for the fall remains a mystery.

One explanation may come from money markets. Authorities had pumped a net 85 billion yuan ($13.7 billion) into money markets at the end of June, just as they were trying to stop a free-fall in share prices.

Stocks stabilised, but then the central bank began cautiously draining funds and short-term borrowing costs crept higher. On cue, stocks tanked on Monday.