SHANGHAI (AFP) - Chinese shares plunged more than six per cent in afternoon trade on Friday as margin traders closed positions and concerns over market overvaluation mounted, dealers said.

The benchmark Shanghai Composite Index slumped 6.46 per cent, or 292.64 points, to 4,235.14, dragging the index into negative territory for the week. The Shenzhen Composite Index, which tracks stocks on China's second exchange, was down 7.25 per cent, or 197.01 points, at 2,519.70.

Chinese shares have more than doubled in value over the past year, partly driven by margin traders flooding the markets with borrowed money.

But Shanghai corrected sharply last week as investors booked profits, dropping 13.32 per cent, and analysts said Friday more leveraged investors were closing their positions.

"Margin traders, especially over-the-counter leveraged traders, reduced or closed their positions on the market, which is the main reason for the plunge," Zhang Gang, an analyst from Central China Securities told AFP.

Outstanding margin debt in Shanghai dropped for a fourth straight day on Thursday to 1.42 trillion yuan (S$306.1 million) Bloomberg News reported.

China's central bank injected liquidity into the banking system on Thursday after halting open market operations for several weeks.