SHANGHAI shares plunged the most in three weeks, sending the key index to a fourth straight day of decline, after China's top auditor announced a nationwide audit of government debt.
Market sentiment was also hit by dismal data showing industrial profits in China rose at a slower pace in June while a continuous increase in borrowing costs reignited fears over a liquidity squeeze.
The key Shanghai Composite Index dropped 1.7 percent, the biggest daily loss since July 8. Daily turnover was weak at 65.9 billion yuan (US$10.8 billion).
China's National Audit Office said yesterday that it will launch a nationwide audit of government debt at the request of the State Council, fueling concern over rising debt levels that may pose risks to the growth of the world's second largest economy.
"The auditing campaign will hit market expectation over economic growth and trigger new uncertainties that will reduce investor appetite for risk and add pressure to the A-share market," Guotai Junan Securities said in a report today.
Market performance was also depressed by data from the National Bureau of Statistics on Saturday showing the combined profits of China's industrial companies rose 6.3 percent from a year earlier in June, lower than an annual gain of 15.5 percent in May and 9.5 percent in April.
Industrial profits increased 11.1 percent in the first six months of the year, down from a 12.3 percent growth in the January to May period, the bureau said.
"The modest easing in industry profit growth comes with the on-going sluggish manufacturing environment," said Zhu Haibin, chief economist for China at JPMorgan in a note. "Indeed, the weakness in manufacturing investment has been a major drag on economic growth in recent months."
Rising borrowing costs that pointed to a tighter liquidity condition was another dampener on the market. The seven-day repurchases rate, a gauge of liquidity strain among banks, increased for an eighth consecutive day in Shanghai today, adding 70.60 basis points to 5.06 percent.
Lenders paced the decline of financial firms. The Industrial and Commercial Bank of China Ltd, the nation's largest lender, decreased 0.5 percent to 3.89 yuan. Industrial Bank Co lost 2.2 percent to 9.13 yuan. China Minsheng Banking Corp fell 3 percent to 8.15 yuan.
CSSC Jiangnan Heavy Industry Co, one of China State Shipbuilding Corp's affiliated shipyards, slumped 9.7 percent to 9.02 yuan after reporting a 60.31 million yuan net loss in the first half of the year.