Chinese stocks have entered bear market territory because of selling by retail and institutional investors, observers said.

The stocks continued their slump on Monday despite recent moves by China's central bank. The People's Bank of China (PBOC) trimmed lending and deposit rates by 0.25 percent over the weekend and also lowered the amount of cash that large banks must keep on reserve by 0.50 percent.

According to generally accepted market wisdom, stocks are in a bear market if they lose 20 percent or more of their value.

The Shanghai Composite Index fell 3.3 percent to close at 4,053.03 on Monday, extending the loss from its peak on June 12 to more than 20 percent. The index swung between a loss of 7.6 percent and a gain of 2.4 percent for the day. The Shenzhen Component Index lost 5.8 percent to finish at 13,566.27.

Some major Chinese companies have seen shares fall precipitously since their peak, The Wall Street Journal reported. Railway giant CRRC Corp Ltd has fallen almost 54 percent as of Monday; SAIC Motor Corp Ltd has lost almost 26 percent; PetroChina Co Ltd is down 25 percent, and Ping An Insurance Co of China Ltd has dropped almost 18 percent.

The Shanghai index has lost nearly $1.2 trillion since June, which is about the combined market capitalization of Spain's four stock exchanges, noted business website Quartz.

"Prices on the Shanghai stock market had gotten out ahead of profits so it is not surprising that there was a correction, though of course it is always impossible to predict the timing of the correction," David Dollar, a senior fellow at the Brookings Institution's John L Thornton China Center in Washington, said in an email. "I believe that it is both institutional and retail investors selling for now."

"I believe it's a correction after an amazing rally within a very short period of time," said Li Gan, a professor of economics at Texas A&M University in College Station, Texas, in an email. He also believes that the selling is coming from both institutional and retail investors.

"Interest rate cut and targeted reserved requirement ratio cut simultaneously are a dramatic move. But the market has been anticipating such a move," Hong Hao, chief strategist at BOCOM International Holdings, said in a research note.

Analysts around the globe have been expressing concern over China's roaring stock market. Even with recent losses, the Shanghai Composite is up 25 percent in 2015, while the Shenzhen Composite has gained 67 percent. This comes despite tepid economic news from the mainland as both exports and imports decline, and industrial production slumps.

It's a question of when the bubble will burst, said Vincent Chan, Hong Kong-based head of equity research at Credit Suisse Group AG, Switzerland's second-biggest bank.

Dollar believes that the moves by the PBOC are intended for the overall economy. "In my view, PBOC's rate cut is aimed at bolstering the real economy, and if it is not sufficient to stabilize growth, then they have more ammunition," he said.

Texas A&M's Gan believes the Chinese economy will have a soft landing from this selloff with or without central bank actions.

"Government actions can only affect the market at the margin, not the trend," he said. "No more substantial rally beyond current price levels. Essentially the bull market is over."

Celia Chen and Dai Tian contributed to this report.