The blue-chip CSI300 index fell as much as 3% before ending down 2.2% at 5,035.54, while the Shanghai Composite Index shed 1% to 3,419.95 points.
The CSI300 index is now in a correction territory, down 15% from an all-time high of 5,922.02 points notched just weeks ago.
Falling the most on Monday, the CSI300 consumer staples index, the CSI300 healthcare index and the CSI New Energy Index slumped 3.8%, 4.2% and 3.9%, respectively.
Growth shares have come under intense pressure globally in recent weeks amid rising inflation fears. Such stocks have been hit especially hard in China due to fears that authorities are keen to reduce generous, pandemic-era stimulus.
“China has chosen to proactively burst the bubbles in stocks with frothy valuations, including by giving window guidance to prevent loans from flowing into stocks and properties market, and by issuing a series of implicit warnings on state-backed media against those stocks,” said Zhang Chengyu, a Beijing-based hedge fund manager.
Zhang said Beijing’s efforts are directed toward preventing or decreasing contagion effects from any bursting of bubbles in overseas financial markets.
China’s regulators have told banks to trim their loan books this year to guard against risks emerging from bubbles in domestic financial markets.
Analysts also said setting a conservative economic growth target this year would give regulators more room to rein in frothiness in the country’s financial markets.
Investors should refrain from sectors with high valuations and shift towards cyclical players that benefit from an economic recovery, Huaxi Securities analyst Li Lifeng said in a report.
China’s industrial output growth quickened in January-February, beating expectations, as the vast manufacturing sector started 2021 on a firm footing. (Reporting by Luoyan Liu and Andrew Galbraith, Editing by Sherry Jacob-Phillips)