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China stocks tumbled more than 1 percent on Monday and looked set for their biggest loss of the year amid signs that Beijing would tolerate more market volatility as regulators clamp down on shadow banking and speculative trading.
Recent signs of stability in China's economy "have provided a good external environment and a window of opportunity to reduce leverage in the financial system, strengthen supervision and ward off risks," the official Xinhua News Agency reported on Sunday.
"Over the past week, interbank rates trended higher, bond and capital markets suffered from sustained corrections and some institutions faced liquidity pressure. But these have little impact to the stability of the broader environment."
The slumped 1.6 percent to 3,123.80 points by the lunch break, after posting its biggest weekly loss so far this year last week.
The blue-chip CSI300 index fell 1.3 percent to 3,423.11. Barring a rebound, the indexes looked set for their biggest one-day percentage loss since mid-December. Daily declines of more than 1 percent in the indexes have been rare for notoriously volatile Chinese markets this year.
"Even the better-than-expected Q1 data could not boost the market, as investors are concerned about regulatory risks," wrote Larry Hu, analyst at Macquarie Capital Ltd, referring to stronger-than-expected 6.9 percent economic growth early in the year.
In the latest of a flurry of regulatory measures, China's insurance regulator said on Sunday it will ramp up its supervision of insurance companies to make sure they comply with tighter risk controls and threatened to investigate executives who flout rules aimed at rooting out risk-taking.
The banking regulator said late on Friday that growth in Chinese wealth management products (WMPs) and interbank liabilities eased in the first quarter, suggesting authorities are making some headway in containing financial risks built up by years of debt-fuelled stimulus.
But while the clampdown is expected to continue, most analysts believe moves will be cautious to avoid hitting economic growth.
Investors are already concerned that the economy could lose momentum in coming months as local governments launch more stringent measures to cool heated property prices.
"Market risk appetites could continue to decline if financial regulation keeps tightening," said Gao Ting, Head of China Strategy at UBS Securities.
"Investors seem to mostly be responding by adjusting their positions, particularly by rotating into high-quality blue-chips."
Banking is the only main sector that ended the morning in positive territory, while small-caps suffered massive sell-offs, with an index tracking start-up stocks falling nearly 2 percent.
In Hong Kong, stocks dipped slightly, with the bearish sentiment from China largely neutralized after the market's favored candidate won through the first round of the French election, reducing the risk of a Brexit-like shock.
The dropped 0.1 percent to 24,016.23 points, while the Hong Kong China Enterprises Index was unchanged at 10,045.78.