Shanghai stocks close down 3.42% on economy worries

China's benchmark stock index closed down 3.42 percent on Thursday as worries persisted over the weak economy and the level of government intervention in the market, dealers said.

The Shanghai Composite Index slumped 129.82 points to 3,664.29 on turnover of 501.2 billion yuan ($78.4 billion).

The Shenzhen Composite Index, which tracks stocks on China's second exchange, dropped 3.00 percent, or 66.56 points, to 2,155.49 on turnover of 480.9 billion yuan.

Chinese shares have been highly volatile in recent months, plunging almost a third in a matter of weeks in June, after having risen over 150 percent in the preceding year.

After the collapse, Beijing intervened with a rescue package that included funding the state-backed China Securities Finance Corp. (CSF) to buy stocks on behalf of the government.

"The concern over the weak economy is definitely there," Phillip Securities analyst Chen Xingyu told AFP.

China's economy expanded 7.4 percent last year, its weakest pace since 1990, and has slowed further this year, growing 7.0 percent in each of the first two quarters.

Chen said investors were also worried about the government scaling back support for the share market, despite a pledge by the regulator that the CSF will continue to intervene for a number of years.

"Investors are also scared that after many companies revealed the share stake holdings of the 'national team'... there won't be any more moves left, since the state has already bought so much stock to support the market," he said.

The national team describes entities, including the CSF, that are trading on behalf of the government.

Shanghai stocks closed up 1.23 percent on Wednesday, erasing a more than five percent plunge in morning trade on expectations of fresh government support.

- 3,500 points -

A surprise currency devaluation last week has also raised suspicions that China's economy could be performing worse than expected.

The yuan closed up 0.13 percent at 6.3875 to the dollar on Thursday, after the central bank set a stronger daily reference rate for the currency. There was speculation the central bank intervened in the market on Thursday to stop a slide in the yuan, Bloomberg News reported.

The People's Bank of China also pumped 120 billion yuan into the money market on Thursday, the central bank said, amid tight liquidity as currency intervention limits funds.

Investors are now watching to see if Beijing will seek to hold the stock benchmark above 3,500 points.

"All eyes are focused on whether the government will shore up the 3,500 level," Nelson Yan, chief investment officer at the Hong Kong unit of Changjiang Securities, told Bloomberg.

"Any inaction could trigger a new round of selling."

Energy firms were among the biggest losers in Shanghai after global oil prices dropped to a six-and-a-half year low. PetroChina slid 4.36 percent to 10.32 yuan and Sinopec lost 3.28 percent to 5.60 yuan.

Property companies also fell. Shanghai-listed Greenland Holdings dropped by its 10 percent daily limit to 20.27 yuan while Shenzhen-listed China Vanke eased 1.52 percent to 14.28 yuan.