The Shanghai Composite Index ended 5.5 per cent down, and the Shenzhen Component Index closed 6.3 per cent lower, bringing back painful memories of the panic-driven sell-off that struck Chinese equities in the summer that wiped trillions of dollars off valuations.

On Friday, Beijing said industrial profits fell more than forecast in October, reinforcing worries about the world's number two economy and prompting investors to sell Chinese shares. The slump intensified in afternoon trading after the China Securities Regulatory Commission (CSRC) said it was widening its investigations into the country's biggest brokerage firms amid a general crackdown on financial irregularities that allegedly caused the summer sell-off.

China's biggest broker Citic Securities said Thursday it was being probed for suspected "rule violations." On Friday, another giant, Guosen Securities, said it was being probed, while second-ranked Haitong Securities halted trading of its shares in Shanghai and Hong Kong.

Little has emerged as to the specific reasons for the probes, but Gu Yongtao, an analyst at Cinda Securities, said the regulator could be trying to get a better grip on leveraged trading after the summer market crash.

"We think the purpose of the probes is to bring all businesses related to stock financing to the table so that regulators can have a clear picture of the leverage situation," he told the news agency Reuters.

And Phillip Securities analyst Chen Xingyu told the news agency AFP the investigations suggested the firms could be in "some serious trouble." But he added Friday's losses were "totally different" from the routs in July and August.

Market jitters mounting

The sharp drop highlights the volatility of China's markets ahead of an expected decision by the International Monetary Fund (IMF) on Monday on whether to include the yuan currency in its global reserve basket.

The yuan softened to a three-month low against the dollar on Friday and was set for its longest weekly losing streak in five months ahead of the IMF's decision next week.

Moreover, markets have been jittery after sources said the CSRC regulator was urging brokerages to cease financing clients' stocks purchases through swaps and other over-the-counter contracts, a move aimed a curbing leveraged trading.

Shen Weizheng, fund manager at Shanghai-based Ivy Capital told Reuters that the demand for deleveraging was having a "negative impact on investor sentiment."

After the stock market slump this summer, Beijing launched a massive and unprecedented rescue effort and began cracking down on insider trading and short-selling, which it said were partly to blame for volatility.

In September, Haitong Securities, for example, was fined 86 million yuan ($13.5 million) by the regulator for breaching securities rules.

uhe/tk (Reuters, AFP, dpa)