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Shanghai - China stocks tumbled to four-month lows on Wednesday morning as investors dumped both small and big caps, defying government attempts to stabilise the market, while nearly half of Chinese listed companies have halted trading to insulate themselves from the meltdown.
The panic in mainland markets is rippling across the border, knocking the Hong Kong market down more than 4%. Overseas-listed Chinese companies also slumped.
The Shanghai Composite Index opened 7% lower, but erased some of the losses by midday, down 3.9%. The CSI300 Index of China's biggest companies dropped 4.8%.
Most blue chips fell, even amid fresh government support, and signs that government-backed investors are buying into financial heavyweights and oil giants including PetroChina and Sinopec to anchor market sentiment.
Some analysts attribute Wednesday's sell-off in blue chips to share suspensions by a huge number of small caps.
On Wednesday, more than 500 China-listed firms announced trading halts, bringing the total number to around 1 300, almost half of China's roughly 2 800 "A share" listed companies.
"Originally, many wanted to hold blue chips. But since so many small caps are suspended from trading, the only way to reduce risk exposure is to sell blue chips," said Du Changchun, analyst at Northeast Securities.
He said he believed the situation could also trigger fund redemptions as investors fear a slump in fund value when those companies resume trading.
China's stock market has so far tumbled 30% from its mid-June peak, reversing a year-long, highly-leveraged bull run, and wiping out nearly $3trn in market capitalization.
A slew of government support measures, including direct purchases of blue chips, a central bank pledge of liquidity support, and a halt in initial public offerings, has not been able to stem the slide.
On Wednesday morning, stocks fell across the board, with only 83 stocks rising and 1 439 falling.
Even Shanghai's top four blue chip exchange-traded funds , the target of intensified purchases by a stabilisation fund set up by Chinese brokerages, and state investor Central Huijin, also fell sharply.
Bank of America Merrill Lynch said China's deleveraging and margin calls could be far from over, with no bottom seen until the government becomes buyer of last resort.
Pessimism has spread to Hong Kong, where the Hang Seng index dropped 4.2%, while the Hong Kong China Enterprises Index slumped 5.3%.
