Chinese stocks plunge more than 6%

Kim Hjelmgaard and Hannah Gardner | USA TODAY

Show Caption Hide Caption Chinese stock woes continue China's Shanghai composite indexplunged more than 6% Tuesday amid fears that the government safety net propping stocks up could get yanked. Kaja Whitehouse reports.

BEIJING — China's Shanghai composite index plunged more than 6% Tuesday and other Asian markets also declined as investors appeared to show a delayed reaction to news that China's market regulator would allow market forces to play a greater role in determining stock prices.

The mainland China stock benchmark's 6.2% drop to 3,748.16 was its biggest decline in three weeks. The index fell 8.5% in late July as worries about China's ability to maintain high economic growth levels undermined investor confidence.

Last week, Chinese stocks sold off following a dramatic devaluation of its yuan currency that led to the nation's central bank injecting cash into the financial system.

Analysts said the immediate cause of Tuesday's sharp sell-off was a delayed reaction to a Friday statement by China's market regulator.

"With market fluctuations gradually shifting to normal, from wild and abnormal, we should let the market exercise its function of self-adjustment," the China Securities Regulatory Commission said Friday in Beijing.

"If I heard the government saying it plans to stop actively supporting the market I would sell too," Francis Cheung, a Hong Kong-based China strategist for brokerage CLSA, said Tuesday. He added that profit-taking by investors was also a likely factor in the drop in prices.

Profit-taking is when investors decide to sell stocks amid rising prices in a bid to lock-in any financial gains.

The steep decline Tuesday in Shanghai marks a return to the volatility that has affected the country's markets for much of the summer amid a yearlong stock rally that market watchers say is unsustainable.

Hong Kong's index fell 1.4% and stocks in Tokyo were down 0.3%. U.S. stock futures showed little reaction to the plunge in China.

European shares saw modest declines. Britain’s FTSE 100 index fell 0.4% and Germany’s DAX was down 0.3%.

Thailand's stock market fell nearly 3% Tuesday, a day after a bomb exploded in Bangkok killing at least 20 people. The nation's baht currency fell to its lowest level in six years.

Hjelmgaard reported from Berlin.