The Shanghai Composite Index plunged by 5.3 percent to close at 1,963.24, down 109.86 points.

It was the second time that the index fell below 2,000 since Dec 4.

The stocks were mainly pulled down by the bank and real estate sectors.

Banks fell by 7 percent on average. China Minsheng Bank, PingAn Bank, and Industrial Bank hit their daily limit.

Among real estate developers, Poly Real Estate and China Merchants Property Development also hit their daily limit.

The plunge is due to lack of investor confidence, said Liu Kan, chief analyst at Guyuan Securities. He added that the economy needs further reform to generate more capital.