Heavy losses among lenders and dairy makers led the market into a freefall in the morning session today.

Chinese banks are suffering in the wake of the Wall Street credit crisis while major dairy companies fell to more than two-year lows after Premier Wen Jiabao ordered an overhaul of the industry after the number of cases of tainted milk recalls increased.

The Shanghai Composite Index sank 5.8 percent, or 112.61 points, to 1,816.44 at 11:30am.

Losers in the Shanghai market outnumbered gainers 808 to 18 while three did not change.

The Shenzhen Composite Index, which tracks the smaller domestic stock exchange, was down 5.90 percent, or 33.02 points, to 526.93.

Industrial & Commercial Bank of China Ltd, the nation’s biggest lender, plunged 7.89 percent to 3.15 yuan (46 US cents) after admitting that it has a US$151.8 million exposure to Lehman Brothers.

Lehman Brothers Holdings Inc, a 158-year-old investment bank, filed for bankruptcy in the United States after failing to find a buyer earlier this week.

China Construction Bank, China’s second-largest bank, shed 8.36 percent to 3.51 yuan while Bank of China, the third largest, lost 4.38 percent to 2.84 yuan this morning.

Bank of China had US$50 million in outstanding loans to Lehman, according to court documents filed by the US brokerage.

China Merchants Bank Co, the nation’s most profitable lender, plummeted 3.59 percent to 13.95 yuan after saying it held US$70 million of debt issued by Lehman Brothers.

Mainland banks are also facing narrower profits margins after lending rates were scaled down by the People’s Bank of China in a move to lift the economy earlier this week.

Inner Mongolia Yili Industrial Group Co, one of the dairy companies linked to tainted milk powder, tumbled the 10 percent daily limit to 10.88 yuan, its lowest since March 2006.

Shanghai-based Bright Dairy declined 6.64 percent to 3.94 yuan. Yili and Bright both fell 10 percent yesterday.