Are China market dabblers throwing in the towel?

Leslie Shaffer | Writer for
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China shares dropped sharply Tuesday, with analysts pointing to a witches' brew of jitters spurring the exodus, including a declining currency, property market worries and tightening measures.

"There's really not a lot to hold onto if you're feeling optimistic about (China), at least not in the short term," said Ben Collett, head of Asian equities at Sunrise Brokers, citing concerns over the shadow banking and property sectors, as well as a sharp fall in the yuan.

(Read more: Does the yuan's slide mark a major shift in policy?)

Analysing China's property sector

"If you're sitting on profits, with these concerns, it's a very sensible thing to sell," he said. "The last short-term guys this morning are getting out." He noted Sunrise may get "stopped out" of some of its China exposure plays in Hong Kong.

The Shanghai Composite ended down 2.0 percent for a more than 5 percent drop over the past four trading sessions, while the Shenzhen Composite finished down 4.0 percent for a nearly 6 percent decline.

(Read more: Is China's property sector facing a day of reckoning?)

The sharp drop in China's yuan may have been the final straw for many players.

"Too many people were getting on the yuan, with 'the only way to go is up,' but now with the deteriorating China economic data and more concern on China's economy and its financial system, there are funds flowing out of this bet," said Jackson Wong, vice president at Tanrich.

Market positioning had become heavily long the currency. The yuan has attracted considerable foreign investor demand over recent years on its steady appreciation and relative stability.

(Read more: The China risk you may have forgotten about)

The yuan fell below its official midpoint fixing at 6.1184 against the U.S. dollar Tuesday for the first time since September of 2012, sparking speculation that the central bank may be intervening as part of a reform drive toward making the currency more flexible.

As the Chinese currency weakened, the U.S. dollar was fetching as much as 6.1218 yuan Tuesday, up from around 6.0982 Monday, according to Reuters data.

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"We think that the recent yuan move is intended to discourage arbitrage inflows. If short-term capital inflows abate, the depreciation will probably halt," Societe Generale said in a note.

Also damping interest in China's markets, the People's Bank of China, the central bank, offered 100 billion yuan in 14-day repo transactions on Tuesday, well above the 48 billion yuan offered last Tuesday, draining liquidity from the market.

(Read more: Why China isn't ready to let trust investments fail)

It's essentially a tightening move, Wong noted. He added that the resumption of initial public offerings in March was another negative catalyst on the horizon, sending the Chinext board to a 5.1 percent drop for the day.

The selloff on Monday was spurred by local media reports that banks are tightening property loans, with the official Shanghai Securities news reporting that Industrial Bank may have ended bridging loans to property-related sectors, including developers as well as suppliers such as cement makers and copper players.

Concerns over China's shadow banking sector have also been brewing in the background, as some defaults have emerged in trust products. Bernstein Research has said it expects more defaults ahead, with more than 40 percent of the 10 trillion yuan of outstanding trust products used to finance shadow banking credit due to mature in 2014.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1