China’s stock markets fell for a second day on Tuesday, but the key Shanghai Composite Index rebounded to close down 0.19 per cent after losing nearly 4 per cent in early trading.

The Shanghai index, which tracks shares, traded in local and foreign currencies, closed at its lowest for seven months despite the central bank’s attempt to reassure investors late Monday.

The smaller Shenzhen Component Index also fell 1.23 per cent after recovering from a loss of more than 4 per cent in early trading.

The losses followed the biggest daily fall for nearly four years on Monday, with both indexes plunging more than 5 per cent amid growing fears of a credit crunch in China.

Monday’s slump in China caused ripples across global markets.

The People’s Bank of China, the central bank, defended its controls of liquidity in a statement quoted by state broadcaster China Central Television late Monday.

Interbank rates were falling and state-run commercial banks retained adequate cash reserves, the central bank said.

Overall liquidity in China’s banking system remained at a “reasonable level,” it said.

On Sunday, the bank said the government would maintain its prudent monetary policy and fine-tune it “at a proper time,” dashing hopes of any major loosening of credit.

The central bank had taken a “tough line” with state-run commercial banks despite recent rises in interest rates for interbank loans, the official Xinhua news agency said.

The central bank was trying to “force domestic lenders to stop channelling money into the informal banking sector ... which has boomed in recent years and fuelled concerns about financial risks,” the agency said.