China stocks fell 1.1 percent on Tuesday to their lowest close since March 2009, led by a drop in small caps, although trade remained light as investors were cautious over tight liquidity conditions ahead of the year-end.
Analysts said investors sentiment was expected to remain bearish after the Shanghai Composite Index fell below the psychologically important 2,200 level.
Without money flowing in, the market has no chance to rebound sharply, said Chen Shaodan, an analyst at New Times Securities in Shenzhen.
The index ended at 2,166.2, extending a 0.7 percent drop on Monday. It has slumped around 23 percent so far this year.
Turnover in the Shanghai market remained low at 37.3 billion yuan, compared with Monday's 36.3 billion yuan, which was the lowest in three years.
Reflecting tight liquidity, short-term rates in the money market pushed up towards a one-month high on Tuesday, with the benchmark weighted average seven-day bond repurchase rate rising 25 basis points to 4.4355 percent.
A slew of companies, including China Communications Construction and Shaanxi Coal Industry, are also lining up to list on the Shanghai exchange which could further strain market liquidity, traders say.
For now, analysts said investors were finding various excuses to trade in holiday-thinned market.
On Tuesday, small-cap shares were the biggest drag, with its sub-index tumbling 2.5 percent.
Makers of paper products, which heavily rely on imports of raw material, came under pressure, partly due to an expectation that yuan appreciation could be limited in next few months.
Nanzhi Co Ltd Fujian and Shanghai Luxin Packing Materials Science & Technology Co dived by their 10 percent daily limit.