Behind stock slump

China's stock market suffered its biggest daily loss in nearly four years on Monday, showing investors' uncertainty over the country's economic prospects and policymaker's intentions.

While the benchmark Shanghai Composite Index slumped by a rare 5.3 percent, financial stocks dropped more than 7 percent following the statement by the People's Bank of China, the central bank, that commercial banks need to do a better job managing their capital and lending activities.

The market has obviously interpreted the central bank's statement as a signal of credit market tightening. Such an interpretation is not groundless, because it will be adding fuel to the fire if the central bank maintains its hands-off approach to shadow banking and other credit problems.