The blue-chip CSI300 index fell 1%, to 5,009.25 points, while the Shanghai Composite Index declined 0.9% to 3,411.51 points.
The United States, the European Union, Britain and Canada imposed sanctions on Chinese officials on Monday for human rights abuses in Xinjiang, and Beijing hit back immediately with broad punitive measures against the EU.
“The sanctions hurt risk appetite, in particular among foreign investors, who sold shares via the Stock Connect,” said Jin Jing, an analyst with Caitong Securities.
“Persistent worries of policy tightening at home also continued to weigh on high flying sectors and stocks with lofty valuations as investors turned cautious,” he said.
China’s monetary policy needs to focus on supporting economic growth in a targeted way while also reducing financial risks, the central bank head said on Saturday.
Foreign investors on Tuesday sold a net 5.1 billion yuan ($783.51 million) worth of A-shares via the Stock Connect linking mainland and Hong Kong, according to Refinitiv data.
Leading the declines, the CSI300 materials index and the CSI300 new energy index slumped 3.6% and 2.9%, respectively.
China’s blue-chip index has fallen more than 15% from an all-time high hit on Feb. 18, led by consumer, healthcare and new energy firms, as investors worry Beijing’s conservative economic growth target for this year could give it more room to rein in bubbles in its financial markets.
Analysts also said pressure was mounting for mutual funds to sell stocks to deal with increasing redemptions, as a correction continued in the stock market.
Enthusiasm about mutual funds has decreased after the Lunar New Year holiday, while there is evident redemption pressure for funds that heavily invest in consumer and health care stocks, CITIC Securities said in a report on March 22, noting the issuance of new mutual funds remained sluggish in March. $1 = 6.5092 Chinese yuan Reporting by Shanghai Newsroom; Editing by Christian Schmollinger