Chinese stocks nosedived Monday morning despite government approval on Sunday to allow the state pension fund to invest in the stock market.

The benchmark Shanghai Composite Index fell 8.45 percent to close at 3,211.2 points by midday, losing almost 38 percent since its peak on June 12 and marking its lowest point since March 9.

The dive almost wiped out all of this year's gains, which have been boosted by government support measures such as pouring in funds and restricting sell-offs.

The Shenzhen Component Index lost 7.72 percent to close at 10,983.42 points. The ChiNext Index, which tracks China's NASDAQ-style board of growth enterprises, fell 8.05 percent to close at 2,153.52.

Shares in all sectors tumbled more than 8 percent. The banking and mining industries lost the least, but still dropped more than 8.3 percent.

The slump came despite the government's decision on Sunday to allow pension funds to invest in the stock market.

The final guidelines released on Sunday allow the pension fund to invest a maximum of 30 percent of net assets in stocks and equities.

While analysts predicted that the entry of the pension fund would boost long-term returns for stock market investors in China, more government rescue measures to boost the economy are expected.

After an 11-percent loss in share values last week, investors expected the central bank to inject more liquidity by cutting the reserve requirement ratio (RRR) over the weekend, but the adjustment did not happen.

Weak economic data also dampened investor confidence. The Caixin flash China general manufacturing PMI retreated to 47.1 in August, the lowest reading since March 2009.

The flash index is the earliest available indicator of manufacturing sector conditions in China. The continuous fall in the index in recent months indicates that the economy is still bottoming out, said Dr. He Fan, chief economist at Caixin Insight Group.