Chinese stocks were on track for their worst day in almost two years on Friday, with blue-chip led carnage pushing the markets firmly into correction territory after steep falls overnight in US stocks.

The benchmark Shanghai Composite Index tumbled as much as 5.9 per cent at one point to a nine-month low before recouping some losses, while the blue-chip CSI300 dived as much as 6.2 per cent. The SSEC ended the morning down 4.1 per cent, while the CSI300 was off 4.4 per cent.

Both indexes were set for their biggest single-day drops since February 2016, when the fallout from a botched attempt to introduce a circuit-breaker mechanism after a market meltdown was still rattling investors.

In Hong Kong, the benchmark Hang Seng Index was down more than 3 per cent by midday, with the sub-index tracking mainland Chinese companies was off around 4 per cent. All sectors fell on mainland and Hong Kong bourses, led by financial and property shares.

The SSE50, which tracks the 50 most representative blue-chips in Shanghai, fell 5.4 percent. It had risen 25 per cent in 2017.

Analysts and market participants attributed the swoon to a cocktail of factors, including increasing margin calls, rising valuations, the government’s growing deleveraging programme and jittery investors cashing out ahead of the long Lunar New Year holiday, which starts next week.

“Valuations on the A-share market are not cheap, considering tight liquidity conditions amid Beijing’s deleveraging efforts,” said Yang Weixiao, an analyst with Founder Securities.

“We could also see impact from the foreign participation that has become a more significant force in the A-share market, as a global selloff could prompt foreign investors to dump stocks in China.”

The level of margin lending had been declining for the past seven sessions in a row.

Margin lending, wherein investors can multiply their investable funds by using their securities as collateral, had dropped to a more than one-month low, in line with steep correction in China’s main stock indices.

Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, said Chinese shares were mostly falling because they were being dragged down by the U.S. correction but he also had some China-specific worries.

“I have become neutral in my country allocation in Asia on China equities due to two concerns: valuations on China-consumer related industries and execution risks on deleveraging (more specifically financial deleveraging),” he said.

At times in the past, China’s government has moved to prop up falling stock markets, but a hedge fund manager who declined to be identified said that was unlikely this time.

“The bet on blue-chips was getting too concentrated, so a big correction was just a matter of time,” he said.

Chinese government bonds held steady. The price of most-traded China 10-year treasury futures for March delivery was flat, compared with the previous close. The yuan, meanwhile, weakened against the dollar on Friday in thin volume, and the Chinese currency looked set for its first weekly loss in nine weeks.

China’s central bank said on Friday it has released temporary liquidity worth almost 2 trillion yuan ($316.23 billion) to satisfy cash demand before the Lunar New Year holiday, which starts next week.

Worries over the health of the world’s second biggest economy also resurfaced, as China’s producer and consumer inflation eased in January. That would support the view that the world’s second-largest economy was slowly starting to lose some momentum after forecast-beating growth of 6.9 per cent in 2017.

“Investors will be very cautious for the moment, and we expect the Shanghai index to drop to 3,000 points, or even further to 2,600 points,” Yang, of Founder Securities, said.

On Thursday, Reuters reported that China had approved licences for an outbound investment scheme known as the Qualified Domestic Limited Partnership (QDLP) plan for the first time since late 2015. The scheme would re-open a channel for Chinese money to invest abroad, potentially adding to liquidity concerns in Chinese markets.