Chinese shares closed down 7.7% today, the biggest fall in more than six years, after regulators cracked down on margin trading that has fuelled a market rally, analysts said.
The benchmark Shanghai Composite Index tumbled 260 points - the biggest one-day decline since June 2008 - to 3,116.35 on turnover of 409.9 billion yuan ($65.9 billion).
The Shenzhen Composite Index, which tracks stocks on China's second exchange, dropped 3.4% to 1,428.37 on turnover of 276.2 billion yuan.
The China Securities Regulatory Commission, the market regulator, said on Friday night that it had suspended three brokerages from opening new margin trading customer accounts for three months after an inspection found rule violations.
Chinese stocks have been surging in recent weeks, triggered by an interest rate cut in November and driven by liquidity and margin trading - investors using borrowed funds to trade on the markets with only a small portion of money put down as deposit.
The three named brokerages - Citic Securities, Haitong Securities and Guotai Junan Securities - are among the country's biggest.
They were found to have renewed expired margin trading and securities lending contracts, in violation of rules.
The regulator doled out lesser penalties to nine other brokerages for similar practices, including allowing unqualified customers to trade on margin.
Analysts said that the CSRC's punishment of the three brokerages for rule violations for margin trading business last Friday was a punch to the market.
They added that the securities regulator might also want the market to ease back, following a more than 50% rise in the Shanghai index last year.
Expectations of further monetary easing following the interest rate cut have boosted stock market sentiment.
The Shanghai index rose almost 53% in 2014 and had gained more than 4% so far this year by Friday.
Analysts said the impact from the regulatory move could impact the market for the rest of the week, but were unsure if the "bull market" was finished. Investors are also waiting for the release of economic growth figures for 2014 tomorrow.
