Over half of the stock market is frozen after more than a thousand companies suspended their shares. Credit:Reuters "There is panic in the stock market; irrational sell-offs have increased greatly and that has led to liquidity tension," a spokesman for the China Securities Regulatory Commission said. The benchmark Shanghai Composite Index was down as much as 8 per cent in early trade, eventually closing 5.9 per cent lower at 3507.19 points – more than 32 per cent down from its June 12 peak of 5166.35. A further 660 companies asked for their shares to be suspended on Wednesday, taking the total number of companies suspended to 1429 out of the 2776 stocks listed on the main Shanghai and Shenzhen exchanges. A quirk of the Chinese sharemarket is its enforcement of the so-called "limit-down" rule, which limits the amount a share price can rise or fall per day to within 10 per cent.

In recent weeks, many stocks have hit the 10 per cent "limit-down" immediately after the open for consecutive days, effectively preventing investors from being able to cut their losses and sell their shares. Out of the 1467 shares that did trade on the two main Chinese exchanges on Wednesday, some 1300 hit "limit-down" shortly after the open. The inability for many to close their positions also means it remains to be seen just how orderly leveraged investors can be unwound from their margin loans. The Commonwealth Bank said there was no imminent threat to China's financial stability or banking industry, pointing out that most loans in China were well-collateralised. "Chinese banks have always been very conservative when lending," the bank's China economist Wei Li said.

Latest official figures have total margin financing for share purchases down from its June 18 peak of 2.27 trillion yuan to 1.77 trillion yuan on Monday, but analysts say loosely-regulated informal lending through umbrella trusts and shadow banks is at least double official figures. The CSFC said Wednesday it had extended a further 260 billion yuan line of credit to China's 21 major brokerages. The funds will help support the purchase of small-cap stocks, following an earlier move to buy up blue-chip shares to bolster the market in a move to inject liquidity into the market. The commission also urged major shareholders, including company directors, to buy up more of their own company shares to stabilise prices. It mirrored a similar call from the supervisory body which oversees China's state-owned enterprises which called on its members to "bravely take on social responsibility" by not reducing their holdings during this period of "abnormal fluctuations in the stock market". The rapid-fire series of coordinated announcements only served to underline the continued inability of Beijing to arrest the market slide, despite the unprecedented stimulus measures which have also included interest rate cuts. "Investor confidence is likely to take some time to recover," Mr Li said. "Judging by Beijing's aggressive responses to support the stock market, there is clearly heightened urgency among policymakers to stabilise economic and social conditions."