The benchmark Shanghai Composite Index slid 3.72%, or 104.84 points, to 2,716.51.
The People's Bank of China (PBOC) decided on Sunday to cut the reserve requirement ratio (RRR) for RMB deposits by one percentage point starting from October 15, but the stance of China's monetary policy remains unchanged.
The main driver, however, appears to be a failure from markets to believe that fresh stimulus from China's central bank, the People's Bank of China, will help prevent US President Trump's trade war from causing an economic slowdown in China.
China's IT sector was particularly hit Monday, with shares losing about 4 percent in the morning session. "And today's fall is not surprising after weak performance in external markets during the holiday".
And on Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE Corp, slumped on a Bloomberg report that the systems of multiple USA companies had been compromised by malicious computer chips inserted by Chinese spies. In the spot market, the onshore spot yuan opened at 6.8718 per dollar and was changing hands at 6.8703 at midday, 93 pips weaker than the previous late session close and 0.19 percent softer than the midpoint.
The dollar index rose 0.12 percent, with the euro down 0.25 percent to $1.1494. Last week, Hong Kong's Hang Seng slumped 4.4 per cent as investors anxious about the escalating trade row.
The People's Bank of China announced on Sunday a 100 basis points cut to the reserve requirement ratio (RRR) for most banks, which will result in an injection of 750 billion yuan ($109.2 billion) in cash into the banking system.
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"We expect the PBoC will continue its easing efforts to keep liquidity ample and loosen its credit control to make funds more accessible to the broader economy", BofA Merrill Lynch analysts said in a note. "Liquidity is not the issue".
Despite the PBOC's official stance that its monetary policy is not yet accommodative, the fourth RRR cut of the year came as trade tensions between China and the US escalate and will likely drag longer than many expect, analysts noted.
Wall Street pared some losses on a day the USA bond market was closed because of the Columbus Day holiday.
Worldwide investors had started to load up on Chinese shares as global index compilers moved to increase weightings of yuan-denominated shares on their benchmarks and this year's slump made valuations more compelling relative to global peers.
The 30-year Treasury bond reached a four-year high of 3.424 percent, and was at 3.4054 percent at the US close on Friday. Prior to Wednesday's market opening, the PBOC set the yuan's midpoint rate at 6.8571 per dollar, the weakest level since August 24, and 131 pips or 0.19 percent weaker than the previous fix of 6.8440.
Reflecting expectations of further yuan weakening, the one-year non-deliverable yuan futures in Hong Kong fell to the lowest level in 15 months, to 7.0095 against the dollar.
China's yuan is forecast to pare some of its recent losses against the dollar over the coming year on hopes that risks from an escalating US-China trade war and a deep sell-off in emerging markets will subside, a Reuters poll found.