China stocks in sharpest drop since 2007

Chinese shares slumped on Monday as investors unnerved by weak economic data chose to lock in profits following last week's rally.

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.

Recent economic indicators suggest 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 a July reading 48.2, the lowest since last April.

The Chinese stock market ended a six-day rally on Friday following a rout 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.

Monday's sharp drop 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.

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.

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.