The Shanghai Composite Index plunged 12 percent last week, erasing all bar one point of the rebound from July’s $4 trillion selloff. For CMB International Securities Ltd. and KGI Securities Co., the gap between the growth outlook and China’s stock valuations, which are the highest among the world’s biggest markets, means further declines are inevitable.

While the benchmark stock gauge still traded 57 percent above the levels of a year earlier through Friday, data from industrial output to exports and retail sales depict a deepening slowdown. China’s first major growth indicator for August showed the manufacturing sector is at the weakest since the global financial crisis.

The government is “trying to defy market forces at overvalued levels,” said Daniel So, a strategist at CMB International Securities in Hong Kong. Policy makers should “focus on helping the real economy instead of the stock market,” he said.

Eoin Treacy's view

The Chinese administration picked the 3500 level on the Shanghai Composite as a level they were willing to defend in July. At the time the level coincided with the 200-day MA but other than that was an arbitrary figure which was high relative to the levels the Index had traded at over the preceding six years. The Index fell through 3500 this morning and the big question for tomorrow’s trading will be whether the government will continue to defend that level or pick an easier to achieve target lower down.

The FTSE China A600 Banks Index has been holding up better than the wider market but broke below the MA last week and extended the decline this week. It is now in reasonably close proximity to the upper side of the underlying base formation near 10,000 but a sustained move back above the trend mean will be required to signal a return to demand dominance.