Speculation of more stimulus

Amid the market turmoil, some foreign investors see an opportunity to buy, believing confidence will eventually return and private Chinese investors will come back to the market.

"At some point, the magnitude of the Chinese market has to reflect its industrial might," said Yu-Min Wang, chief investment officer at Nikko Asset Management which oversees around $170 billion.

However, a Reuters poll showed that Chinese fund managers had cut the proportion of their portfolios to be invested in stocks over the next three months to a 6-1/2-year low.

Beijing's unprecedented but so far unconvincing efforts to hold up the market have led foreign investors to air doubts about the leadership's ability to ensure financial stability at a time of slowing economic growth, high corporate debt and the threat of deflation.

On Thursday, investors took fright at a newspaper report that banks were trying to get to grips with their financial exposure to the market slump, through wealth management products and loans collateralized with shares.

Reuters could not verify the report.

There are some worries about the impact of falling share prices on the real economy, though household ownership of shares is very low and - apart from a further drop in luxury car prices - there has been no concrete evidence yet of a major impact on consumption.

However, the market rout has rekindled expectations that the People's Bank of China will ease monetary policy further in the next few weeks. It has already cut interest rates four times since November and repeatedly loosened restrictions on bank lending.

Japanese brokerage Nomura said in a note this week that it expected another 50 basis point cut to the reserve requirement ratio for banks, which would free up more money for lending, and another interest rate cut of 25 basis points before year-end.

China's Politburo, a decision-making body of the Communist Party, this week promised to step up targeted adjustments of economic policy to foster stable growth.