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Chinese stocks dive as credit crunch fears escalate

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Chinese stocks sank deeper into bear market territory on Tuesday as fears over a credit crunch in China escalated.

The Shanghai Composite index fell as much as 5.3% below the 1,900 mark, before recovering to trade 2.4% lower at 1,916.

This is the first time the index has fallen below the 1,900 mark since January 2009 and it is now down 14.5% year to date.

Last week, rating agency Fitch Ratings warned China may be nearing a credit crunch as its shadow banking system is spiraling out of control.

Concerns deepened this week, as China’s central bank indicated it is likely to continue its credit-tightening policy, stemming the flow of cheap money into the global economy.

Other Asian markets were dragged down by their neighbour. The Nikkei declined by 0.7%, Korea’s Kospi was down 1% and Hong Kong’s Hang Seng erased earlier gains to finish fairly flat at 19,845.

The news from China was a also a drag on commodities as markets reacted to fears of weaker Chinese demand, with copper hovering near a three-year low.

Miners in the FTSE 100 suffered a ripple effect from weak Chinese data, with Rio Tinto and Royal Dutch Shell among the bottom performers of the index on Monday.

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