An official survey on Friday, which focuses on larger, state-owned firms, showed a fifth month of contraction, though a pick-up in the services sector could cushion the impact on the broader economy.
Investors fear a glut of equity supply could swamp Chinese markets this year, with a six-month share sales ban imposed on listed companies' major shareholders due to expire on January 8.
A new set of rules for initial public offerings took effect on January 1, while the government may launch a US-style registration system for IPOs as early as in March, potentially making it easier for companies to list.
Analysts also attributed today's sell-off to weakness in the yuan, which the central bank allowed to slip to fresh four-and-a-half-year lows, adding to worries about increased capital flight as economic growth grinds lower.
Shanghai stocks ended 2015 up nearly 10 per cent, beating Wall Street and most other major markets, and shaking off a savage summer rout that wiped out a third of the market's value at one point. Stocks in China and Hong Kong fell across the board.
China's relatively expensive and highly speculative start-up board ChiNext tumbled over 6 per cent.
The Australian share market has also closed lower on its first day trading day in 2016, in the wake of a weak lead from US markets and profit-taking by investors.
CMC Markets chief market analyst Ric Spooner said the fall in the local bourse on Monday was not all that unexpected, even though early trading was positive.
"We had a weak lead from US markets. What was a bit surprising was that we defied gravity for a little while this morning," Spooner said.
"Aside from the US, gravity is setting in a little bit after the solid and pretty much one-way (market) rise before Christmas - the market was vulnerable to a bit of profit-taking."
A rally on US markets cooled on New Year's Eve, with the Dow Jones Industrial Average falling by about one per cent.
Spooner said high-yielding stocks such as the major banks and supermarket operator Woolworths led the Australian market down on Monday.
But tensions between major oil producers Saudi Arabia and Iran had pushed up oil prices, which was benefiting oil stocks.
Spooner said overseas manufacturing data and US jobs figures to be released over the week, and commodity prices would likely provide near-term direction for the local market.
The New Zealand stock market resumes trading tomorrow after closing at a record on New Year's Eve.
- AAP
