China shares dropped more than 1 percent as investors took profit on the year's outperformers after short-term money rates spiked on Wednesday as official media said the central bank may soon tighten liquidity.
The CSI300 of the leading Shanghai and Shenzhen A-shares closed down 1.1 percent at 2,418.5 points, while the Shanghai Composite Index sank 1.3 percent. Both reversed early gains to post their biggest daily loss in a week.
The Nasdaq-style ChiNext of mainly high growth, penny stocks listed in Shenzhen tumbled 2.8 percent. It is still up 70 percent for the year.
It also slid 2.8 percent on Tuesday in record high volumes as investors unwound positions in counters seen as most driven by speculative trades this year.
With the month-end approaching, money market rates are back in focus, with investors spooked on Wednesday by a sharp rise in China's benchmark seven-day repo contract in the morning.
A policy adviser to the People's Bank of China (PBOC) told Reuters on Tuesday the authority may tighten cash conditions in the financial system to address inflation risks.
The official China Securities Journal reported on Wednesday that the PBOC may act to prevent liquidity from becoming too loose following an influx of funds on expectation of a higher yuan.
Still the Chinese banking sector outperformed the broader market after Ping An Bank's robust third quarter earnings. This suggests that the market, while jittery, is not panicking about a repeat of the end-June cash crunch.