- Chinese firms have been under pressure since the government began tightening rules on lending
- There were also reports that the sharp fall was also due to firmer bond prices
- Thursday was also a weak day for stock trading across the world, with U.S. indexes and the Japanese Nikkei all closed for the session
Chinese equities saw heavy losses Thursday following new liquidity rules in the country and as global investors opted for safe-haven assets like sovereign bonds.
The Shenzhen composite closed down 2.9 percent and the tech-heavy Chinext composite lost 2.77 percent. The Shanghai composite dropped 2.2 percent with the technology, consumer non-cyclical and health-care sectors recording the steepest losses on the day.
Meanwhile, the blue-chip CSI 300 index was down by 2.9 percent by the end of the day, its biggest one-day fall in percentage terms since June 13, 2016, according to Reuters. Hong Kong's Hang Seng Index slipped by around 1 percent, a day after closing above the 30,000 mark for the first time in a decade.
Ken Peng, Asia-Pacific strategist at Citi private bank, told CNBC Thursday that over the weekend he had heard views about particular Chinese stocks having moved too fast. He also said that Thursday's downward move was impacted by "relative tight liquidity conditions in financial markets overall, because of a more stringent liquidity policy by the central bank."
Chinese firms have been under pressure since the government began tightening rules on lending. In particular, last week, banking regulators prepared a new set of rules to oversee the relationship between commercial lenders and their shareholders. Authorities have also introduced other measures, such as restrictions in loans to the shadow banking sector, and there is a general view that China is stepping up the deleveraging of its domestic economy.
Meanwhile, there were reports that the sharp fall was also due to firmer bond prices with the dollar also dropping overnight after the minutes from the Federal Reserve's latest policy meeting. Thursday was also a weak day for stock trading across the world, with U.S. indexes and the Japanese Nikkei all closed for the session.
"I think it's to be expected that you have periods of some weakness coming through," Richard Hodges, head of unconstrained fixed income at Nomura Asset Management, told CNBC Thursday.
Hodges is bullish on global growth, saying that global economic markets are suggesting that we are going through a world of expansion. He said he was seeing "very little evidence' that markets will actually start slowing.
"I think it's unwise to actually draw a conclusion from China and from the equity market given the performance which we have seen in global equity markets this year," he added.
Peng from Citi also said that the fundamentals of the companies suffering the losses on Thursday were good.
"I don't think this is a change in fundamentals of companies that are being affected. When you look at the ones that are being sold off the most over the past several days, they actually made those gains over the past three weeks."
—CNBC's Cheang Ming contributed to this report.