Chinese mainland stocks tumbled to a two-month low on Monday as investors feared about market liquidity being drained by the country's runaway property market, new share sales as well as the monetary authority's intention to curb financial leverage.

The benchmark Shanghai Composite Index fell by 1.76 percent to 2980.43 points, while the Shenzhen Component Index dropped by 2.05 percent to 10392.7 points. The markets' decline was mainly led by sales of defense, resources, trade and computer-related electronics stocks.

The cooling stock market is in sharp contrast to China's overheated property market, sparking fears that soaring housing prices in some cities would pressure the equities market by channeling capital out of it.

"Capital has fled the A-share market and flown into the red-hot property market and the Hong Kong stock market. Market liquidity is being drained and there is limited room for upward movement," analysts at Founder Securities wrote in a research note.

Gao Ting, head of China strategy at UBS Securities, said that a housing boom is in full swing and the signs of a resurfacing housing bubble have weighed on investor sentiment.

"Credit-driven housing booms are susceptible to policy shifts in China. If another housing downturn materialized, it would put more stress on the financial system, whose stability has long been a source of investor anxiety," he said.

Some economists also worried that China's soaring housing prices could pose a challenge to the value of the Chinese currency and the equities market as investors may be prompted to buy assets overseas to preserve the value of their wealth.

Monday's market decline also came after the country's securities regulator on Friday approved 12 initial public offerings in the A-share market, which will raise an estimated 15.5 billion yuan ($2.32 billion).

Meanwhile, the People's Bank of China on Monday pulled a net $37 billion, the biggest daily withdrawal in six months, from the inter-bank market through reverse-repurchase agreements. The move reinforced market speculation about the monetary authority's intention to curb excessive credit growth and to lower financial leverage.

"Tighter financial regulations on shadow banking and other areas including banks' wealth management business and insurance investment in recent months, which could lead to financial deleveraging over time, have been on the mind of A-share investors for some time," said Gao from UBS Securities.

Alain Bokobza, head of strategy for global asset allocation at French bank Societe Generale said that the bank still sees virtues in exposure to emerging market assets as the stabilization of Chinese economic growth could be a positive factor and the US Federal Reserve has refrained from raising interest rates.

"We prefer bonds to equities as real yields and the monetary policy outlook remain supportive," he said.