Stocks sink for a second day, Shanghai index down 3.5%

An investor stands in front of a screen displaying stock indices and prices of shares at a stock brokerage house in Jinan city, East China's Shandong province, Aug 24, 2015.[Photo/IC]

Stocks tumbled on Tuesday for a second day, with the benchmark Shanghai index diving 3.5 percent, despite securities watchdog assuring the market of limited impact on illegal margin financing probe.

The benchmark Shanghai Composite Index retreated 109.63 points to 3,005.17 at the close, while the Shenzhen Component Index sank 5 percent to 9,290.81.

Steel, technology and defense sectors led the decline on Tuesday. Chongqing Steel Co and Hebei Steel Co slumped by the daily limit of 10 percent. Aerospace Communications Holdings Co and auto and aerospace equipment manufacturer HT-SAAE slid 10 percent.

Dongfeng Motor and Xiamen King Long United Automotive Industry Co dropped 10 percent.

The slide continued, despite securities regulator stating a crackdown on illegal margin financing would not have significant impact on markets, for only a small percentage faced forced liquidation, on Monday evening.

As of Friday, 39 percent or 2,094 accounts suspected of wrongdoings were yet to be cleaned up, which hold combined 187.6 billion yuan of stocks, according to China Securities Regulatory Commission (CSRC).

Of the 3,255 accounts cleaned up, 76.3 percent chose to adopt legal way of financing, whereas only 6.3 percent cancelled their accounts altogether, said Deng Ge, spokesman of the CSRC, via its microblog.

"Forced liquidation was at a low level, therefore based on current pace, clean up on the rest won't have significant impact on markets," he said, adding that investigations into unauthorized securities businesses and accounts that were registered under false names have come to an end.

The securities watchdog last week punished four of the country's largest brokerages for failing to verify clients and knowingly providing services to unqualified investors through a system developed by Hundsun Technologies.

Haitong Securities, Huatai Securities, Founder Securities, GF Securities and Zheshang Futures Co were fined a combined 178.5 million yuan ($28 million) for carrying out alleged illegal trading activities.

The CSI 300 index closed at 3,152.23 on Tuesday, down 3.9 percent.