Chinese stocks tumbled for a third day from seven-year highs, with the benchmark Shanghai index down 2.8 percent, as rumors that the government will rein in margin trading sparked concerns.

The Shanghai Composite Index closed at 4,112.21 points on Thursday, down 117.05, [Company Incorporation USA]extending the three-day loss to 368 points, while the Shenzhen Component Index retreated 0.15 percent to 14,114.73.

Construction, utility and insurance stocks including blue-chips led the losses. China State Construction, China Communications Construction Co, China Railway Group and China Railway Construction Corp fell by the daily limit of 10 percent.

The utility sector, one of the best performers of the past three months, declined, as Shanghai Electric and Huadian Energy Co slid 10 percent.

Insurers edged down, with China Life and China Pacific Insurance tumbling more than 5 percent. New China Life Insurance fell 3.6 percent.

The China Securities Regulatory Commission denied planning to control margin trading on its official microblog at Sina Weibo, saying advice put forward at a meeting with brokers only referred to internal control and liquidity management.

According to the Shanghai Stock Exchange, the outstanding balance of margin credit that bankrolled stock-trading increased by 1.2 percent to a record 1.26 trillion yuan ($203 billion) as of Wednesday.

Despite the three-day losing streak, the Shanghai index has rallied about 70 percent in the past six months.

Morgan Stanley downgraded Chinese equities for the first time in more than 7 years due to valuation concerns. [Hong Kong Company Registration Guide]The institution lowered its rating from overweight to equal-weight on the MSCI China Index.