China’s benchmark stock index fell almost 6 per cent on Monday, dropping through the 3,000 point level and extending two weeks of falling prices that have wiped out two months of gains.

The drop was the largest in percentage terms in nine months and appears to reflect concern over government efforts to rein in bank lending that has been diverted to the country’s stock and property markets amid an unprecedented credit boom.

The Shanghai Composite index, China’s most-watched benchmark, fell 5.8 per cent to 2,871 on Monday, a drop of more than 17 per cent from the peak it reached on August 4, when the market was up 91 per cent for the year.

The index is up 58 per cent from the start of the year but is still far below the levels it reached in late 2007, when it topped 6,090.

The market appeared to ignore an attempt by China’s top securities regulator on Friday to boost sagging stock prices with supportive comments.

Such verbal interventions from senior leaders have often roused the market in the past but on Monday more than 100 Shanghai-listed companies fell by their 10 per cent daily limit. Turnover in Shanghai was also subdued, falling to about half the level seen two weeks ago when prices were rising.

In June, Beijing lifted a nine-month ban on new share sales, precipitating a flood of new applications for initial public offerings and secondary share issuances from mostly state-owned companies.

That has added to concerns about fresh supply, just as the government moves to rein in the flood of liquidity that has driven prices up this year.

In the first half of the year, Chinese banks added Rmb7,370bn ($1,078bn) in new loans to their books, triple the amount extended in the same period a year earlier. Most of the loans went to large state-controlled enterprises and by some estimates as much as half of the money found its way into real estate, stock markets or other financial assets.

Last month, the central bank ordered the country’s largest banks to slow lending growth and the banking regulator introduced stricter regulations to try and ensure new loans were directed to the real economy rather than speculative activity.

Bank lending in July fell 77 per cent from a month earlier to Rmb356bn, the lowest amount of new loans since October, raising fears that the flood of easy credit is now receding.

The specific trigger for Monday’s plunge might also have been disappointment in data on Friday showing US consumer confidence has not recovered, according to Jerry Lou, China equity strategist at Morgan Stanley.

Without a rebound in US demand for Chinese exports, many economists believe it will be hard for China to sustain a strong economic recovery.

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