2nd Ld-Writethru-China Focus: China stocks in sharpest drop since 2007

Chinese shares slumped on Monday as investors unnerved by weak economic data dumped their shares to lock in profits following last week's rally, sinking the benchmark index into the worst single-day loss in eight years.

The benchmark Shanghai Composite Index plunged 8.48 percent to close at 3,725.56 points, in the sharpest daily drop since Feb. 27, 2007. The smaller Shenzhen Component Index fell 7.59 percent to close at 12,493.05 points.

Nearly 2,000 shares fell by the 10-percent daily limit.

The plunge ended a six-day rally following government's concerted effort to arrest the freefall that wiped nearly a third off the value of the market since mid-June.

"Historically, it takes time to restore market confidence after such a long period of sharp decline. The market is expected to linger at the bottom for a while before it can stage a sure rally," said China Southern Asset Management Co., Ltd in a research note.

The sharp drop came amid fresh data that showed China's growth continues to face strong headwinds.

The National Bureau of Statistics said on Monday that profits at major Chinese industrial firms dropped 0.3 percent year on year in June, down from a 0.6-percent growth posted in May.

The preliminary Caixin China Manufacturing Purchasing Managers' Index (PMI) released on Friday retreated from 49.4 in June to 48.2 in July, the lowest since last April.

Monday's sudden fall was also a result of investors choosing to lock in profits following last week's rally of around 20 percent, which was a bit "steep," China Southern Asset Management Co., Ltd. said.

Market sentiment has become increasingly fragile following the drastic ups and downs in the previous weeks. The market considers 4,000 points an "important psychological mark" and risks are believed to escalate as the Shanghai index rises above it.

The stock market is also under external pressure from factors such as the increasing likelihood of the United States hiking its interest rates soon, which would probably entice investors to move money from the China market, said Wang Han, an analyst with Industrial Securities.

After the massive sell-off since mid-June, the Chinese government has unveiled a slew of measures to prop up the market, including reducing the number of new shares to avoid a shares glut, a police crackdown on short-selling and a six-month ban on big shareholders selling stocks.

However, it seems the government orders may not have been carried out by everyone.

Major shareholders in five listed companies including Shandong Yanggu Huatai Chemical Co.,Ltd. are under investigation for allegedly selling company shares, the China Securities Regulatory Commission said over the weekend.

While some economists hailed the government's move to stem risks to the broader economy, some others suggest more market-oriented measures be taken as they believe government intervention is only delaying the inevitable.

Before the market took a downturn on June 12, the Shanghai composite had risen by 152 percent since July 2014 and nearly 60 percent since the beginning of the year, galloping far ahead of economic fundamentals during the period.

Regarding the impact of the recent stock market rout, global rating agency Moody's said in a latest report that the turbulence will not have a major spillover effect on China's real economy.

"The direct impact from heightened volatility in China's equity market on financial sector output growth will be limited, while the indirect effects of market uncertainty on consumer spending, employment and corporate investments will be similarly muted," says Michael Taylor, a Moody's managing director and chief credit officer for Asia Pacific.

Echoing Moody's, rating agency Fitch also reckons the market volatility does not pose a systemic risk to the nation's real economy or financial system, with Chinese banks having relatively little direct exposure to stocks. Endi