China’s crackdown on stock purchases by insurance firms sent shares in Shanghai and Shenzhen sharply lower on Monday, while markets elsewhere in Asia pared early gains made on surging oil prices.

The Shanghai Composite Index SHCOMP, -1.72% ended down 2.5%, the biggest one-day drop in percentage terms since June 13, with nearly 1,000 stocks in the red. The Shenzhen Composite Index 399106, -2.45% ended 4.9% lower, and the startup-focused ChiNext SZX00065, -2.46% board fell 5.5%.

Late Friday, China’s insurance regulator banned insurer Evergrande Life from further investing in stocks, saying it had been conducting short-term trading on the stock market. The recent stock investment spree by a few major insurers have helped boost trading activity in the Chinese markets.

Also on Friday, Foresea Life, an arm of Chinese financial conglomerate Baoneng Group, pledged to gradually reduce holdings in a Shenzhen-listed, home-appliance heavyweight. This would mean an unwinding of the stake-building activity that led to harsh disapproval from Chinese regulators.

“It’s clear that the regulator is strongly against such stake buying by insurers that may disturb management of listed firms,” said Deng Wenyuan, an analyst at Soochow Securities.

However, “investors did not expect a sudden tightening up over insurers,” the analyst said.

Shares of Chinese insurers were among the big decliners in the A-shares market on Monday, with China Life Insurance 601336, -0.79% coming back from earlier losses to end down 1.1%, and New China Life Insurance 601336, -0.79% ending 1.8% lower after steep declines initially.

Donald Trump questions 'one China' policy

Meanwhile, comments Sunday by U.S. President-elect Donald Trump that there may be a change in the U.S.’s acceptance of the “one China” principle, a cornerstone policy that has helped maintain peace between China and Taiwan, also hurt investor sentiment, analysts said.

“People were expecting trade disputes but not fundamental differences in ideologies between the two nations,” said Hao Hong, managing director of research at the Bank of Communications.

But Trump’s comments helped the Taiwan’s Taiex XX:Y9999 set an 18-month high before closing 0.5% lower, dragged down by the slide in Chinese domestic stocks. Fitch Ratings earlier struck a cautious tone that a cooling off of relations with China would hurt the island.

Oil deal boosts Aussie energy names

Elsewhere in the region, Australia’s S&P/ASX 200 XJO, -0.81% was flat, after earlier dipping into the red, despite strength in key oil stocks and a rise in the price of Brent UK:LCOG7 the international oil benchmark.

Over the weekend, the Organization of the Petroleum Exporting Countries reached an agreement with other oil-producing nations to remove 558,000 barrels a day of crude oil from the market. That would come on top of 1.2 million barrels a day in cuts already agreed to by OPEC, amounting to a total of almost 2% of global oil supply.

Among key energy stocks in Australia, Oil Search OSH, -3.87% ended 3.5% up, Woodside Petroleum WPL, -1.96% gained 2.9% and Santos STO, -1.94% surged 5.1%. In Japan, shares of Japan Petroleum Exploration 1662, -3.77% rose 3.8%.

Bucking the region’s weakness, the Nikkei Stock Average NIK, -1.10% held on to some of its morning gains, with the benchmark index ending up 0.8%.

Japan benefited from a stronger dollar, with the yen USDJPY, -0.12% about 0.7% weaker against its U.S. counterpart, compared with its level at the Nikkei’s close on Friday. A weaker currency helps make the country’s exports more competitive. The greenback was last trading 0.3% higher against the yen on Monday.

The dollar gained on Monday as a near-certain interest-rate increase by the Federal Reserve was set for later this week when the Federal Open Market Committee meets. The WSJ Dollar Index BUXX, +0.09% , which measures the U.S. currency against 16 others, was flat, after rising 0.5% in the U.S. on Friday.

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However, some analysts cautioned that the market may not be prepared for any hawkish commentary from the Fed this week that could affect investor trading sentiment.

“It is only a matter of time before the Fed gets hawkish because of inflation,” said Kay Van-Petersen, global macro strategist at Saxo Capital Markets in Singapore.