SHANGHAI, Nov 20 (Reuters) - China stocks fell sharply on Monday and were heading for their biggest daily loss in three months after Beijing set sweeping new guidelines to regulate asset management products, which analysts said will dampen investors' appetite for riskier assets.
The central bank issued the new guidelines on Friday to more strictly regulate asset management businesses, in the government's latest effort to rein in the risky shadow banking sector which had been channeling money into Chinese stocks, bonds and property.
At the end of 2016, the collective outstanding volume of the asset management business was 102 trillion yuan ($15.38 trillion).
Shanghai's benchmark index SSEC tumbled over 1 percent to a two-month low, while China's blue-chip CSI300 Index was down roughly 1 percent.
Barring a rebound, both indexes were on track for their worst day since mid-August.
The draft guidelines, which will unify rules covering asset management products issued by all types of financial institutions, and will set leverage ceilings on such products, won't have an immediate impact. There will be a transition period that lasts until June 30, 2019.
Still, there was a psychological impact on the market.
"Tougher rules on banks' wealth management products will seriously curb money flows into the stock market from lenders," Li Haoshu, analyst at Chuangcai Securities, wrote in a market comment.
"In addition, restrictions on leverage will hurt liquidity levels, and hurt risk appetite."
Li Huiyong, an economist at Shenwan Hongyuan Securities, said liquidity and market yields could suffer from the new rules, which stipulate that financial institutions must end the practice of providing investors with implicit guarantees against investment losses.
"The new guideline is not the last shoe to drop, or the last piece of bad news," Li said. "The era of tough financial supervision has just begun."
All main sectors fell, with big losses seen in the real estate and financial stocks, which will bear the brunt of the new rules. (Reporting by Samuel Shen and John Ruwitch; Editing by Kim Coghill)