"A divergence in sentiment between onshore and offshore investors reflects their approach towards investing in Chinese markets," said Ben Kwong Man-bun, the head of research at KGI Asia.

Kwong said overseas investors in Hong Kong utilised market volatility to cash out of mainland Chinese stocks while retail investors in mainland China still held on to them in the belief that the government would do everything in its power to keep the market up.

The benchmark Shanghai Composite dropped 1.29 per cent on Tuesday, after rising 2.4 per cent on Monday following Beijing's weekend measures to revive sentiment with a 120 billion yuan stock rescue fund and liquidity support from the People's Bank of China.

Both the Shenzhen Composite and the Nasdaq-style ChiNext indices fell more than 5 per cent.

More than 1,700 stocks were suspended from trading after they fell their daily 10 per cent limit.

The key Shanghai and Shenzhen indices have lost 27.2 and 37.7 per cent, respectively, from their June 12 peaks.

Sale of mainland Chinese shares through the Shanghai-Hong Kong Stock Connect surged to the highest level since its launch in November last year. The scheme saw net selling of 13.4 billion yuan of mainland Chinese shares.

All 88 dually listed firms in Hong Kong were trading at a discount to their Shanghai counterparts. Nearly half of these companies, including large-cap PetroChina, Air China, China Citic Bank Corp, are trading at a 50 per cent discount, partly because of Beijing's move to stabilise the markets by investing in blue chips.

Leon Tucker, Fidelity's head of equity research for the Asia-Pacific, said Beijing's progress in reforming state-owned enterprises had been slower than most investors' expectations, leaving them doubtful about the growth outlook for the world's second-biggest economy.

Tucker's comments underscore overseas investors' scepticism over the mainland's stock markets.

Mainland Chinese companies raised a record amount of fresh capital through private share placements and initial public offerings in Hong Kong and mainland China in the first six months of this year.

Tucker said the valuations of mainland Chinese shares had become more attractive after the recent sell-off.

He reiterated his confidence in the white goods and car industries, in step with the rise of the middle class.

"We see signs of acceleration of earnings in the next two years, after a low single-digit growth this year," Tucker said.

The yesterday said more than 200 companies listed in Shanghai and Shenzhen filed for trading suspension after about 25 per cent of the 2,800 listed firms made a similar request on Monday.

In a bid to restore investor confidence in small-cap stocks, China Financial Futures Exchange said on Monday it would tighten the daily purchase of CSI 500 stock index futures to 1,200 lots and strengthen supervision of hedging activities.

Deep discount offered on Haitong shares

A unit of state-backed investment firm Haixia Capital has launched a deeply discounted block deal in Haitong Securities seeking to raise about US$820 million, after the stock slumped by more than a quarter in the past two days.

Stock brokers have come under severe pressure after the central government pressed 21 brokerages into action to utilise 15 per cent of their net assets, or about 120 billion yuan, to buy stocks as part of a Beijing-led effort to calm investor sentiment.

Dawn State, a unit of Haixia Capital, is offering 569.4 million shares in a range of HK$11.12 to HK$12 each, representing a discount of up to 20 per cent to its last traded price.

The sale comes just six months after Dawn State acquired the stake in China's No 4 listed stock broker, Haitong Securities, at HK$17.18 each. Even if the trade closes at the top end of the marketing range, Haixia is set to take a 30 per cent loss on its investment.

Reuters