Chinese Stocks Plunge 6.7%; Japan Ends Down

China's key stock index dived 6.74 percent on Monday to a three-month closing low and recorded its second-biggest monthly loss in 15 years, after surging stock valuations overwhelmed improvements in corporate earnings while new share supplies compounded a drop in liquidity.

The Shanghai Composite Index (-6.74%)closed at 2,667.745 points, tumbling 21.8 percent for August after recording seven consecutive monthly gains.

Reflecting a clear weakening in investor sentiment, Chinese fund managers reduced their recommended allocation to equities for the first time in six months, on concerns that a possible liquidity tightening may sap demand for stocks, the latest monthly Reuters poll of fund managers shows.

A boom in initial public offerings was also cited by some fund managers as a risk to the stock market, which rallied 60 percent in the first six months of this year on ample liquidity and an improving economy.

Continuing a stream of fresh shares flowing into the market, Metallurgical Corp of China's Shanghai A-share initial public offering, which aims to raise about 16.85 billion yuan ($2.47 billion), will start book-building on Tuesday and take subscriptions next week.

The index slipped below the 125-day moving average for the first time since early February.

The drop below the key chart line, used by many Chinese investors to delineate a bull versus a bear market, encouraged more investors to flee stocks.

Losing Shanghai A shares outnumbered gainers by 859 to 27 while turnover for Shanghai A shares dropped to thin 124 billion yuan ($18 billion) from Friday's 133 billion yuan, reflecting a lack of buyers, traders said.

China Merchants Bank, one of the most active stocks, closed down 6.26 percent at 13.63 yuan after the lender raised its maximum fund-raising target for a planned rights issue by 22 percent to 18 billion-22 billion yuan, due to a likely tightening of banks' capital adequacy rules.

The index sank 2.9 percent on Friday amid worries about a steep drop in Chinese bank lending in August, which would trim liquidity flowing into stocks.

But analysts said slowing lending should have no major impact on the economy, partly because Chinese companies are turning a large share of the short-term discounted bill financing they received in the first half of this year into long-term investment in the second half.

Hong Kong’s Hang Seng followed suit (-1.86%) and closed nearly 2 percent lower.

China Merchants Bank skidded 3.6 percent to HK$16.82 after the country's sixth-largest lender raised its maximum fund-raising target for a planned rights issue by 22 percent to 18 billion-22 billion yuan ($2.6-3.2 billion), due to a likely tightening of banks' capital adequacy rules.

Singapore’s Straits Times Index (-1.89%) also fell.

Japan Ends Down; China Trumps Election

Japan's Nikkei average fell on Monday as a stronger yen sent exporter shares lower and weak Shanghai stocks added pressure, erasing an jump to an 11-month high after an opposition election win.

Sunday's landslide victory for Yukio Hatoyama's Democratic Party ends a half-century of almost unbroken rule by the Liberal Democratic Party and breaks a deadlock in parliament, and analysts said the Nikkei's volatile moves showed the market was grappling with how to interpret the win.