China's CSI 300 blue-chip share index closed down nearly 2% to its lowest level since Sept. 30, 2020, and the Shanghai Composite index ended 1.8% lower.
The CSI Smallcap 500 Index and the start-up market ChiNext declined 2.6% and 3.6%, respectively.
More than 94% of the stocks listed in China's A-share markets dropped, according to data from financial information services provider Wind.
The slump came amid a global pullback in equities after the Fed chief warned that inflation remains above the Fed's long-run goal and supply chain issues may be more persistent than previously thought.
"The recent performance of overseas markets is a factor weighing on the A-share markets," said Zhang Yanbing, an analyst at Zheshang Securities. "Moreover, investors are worried there may be more corrections in overseas markets when mainland markets are closed during the holiday."
Mainland Chinese markets will be shut for China's week-long Lunar New Year holiday, which starts Jan. 31.
Foreign investors were heavy sellers of Chinese shares on Thursday, with Refinitiv data showing 11 billion yuan of outflows through the northbound leg of China's Stock Connect programme.
Data from East Money Information showed outflows on Thursday were the largest since July 24, 2020.
Losses were led by tech shares, with an index tracking the computer sector down 3.9%. Semiconductors and new energy shares lost more than 3% each.
In Hong Kong, the Hang Seng index tumbled 2% and the China Enterprises Index ended 2.6% lower.
Index heavyweight tech giants dragged the Hang Seng lower. The Hang Seng Tech Index plunged 3.8%, with e-commerce giant Alibaba Group down 7.2% to a record low. Delivery firm Meituan also closed down nearly 7%.
Also weighing on tech names was the news that China will pick up the pace in "perfecting" legal rules against unfair competition among companies, with a focus on areas such as the platform economy, technological innovation, information security and livelihoods.
Real estate developers declined 2.6%. China Evergrande dropped 3.4% after its thinly detailed roadmap for restructuring left investors dissatisfied, while Logan and Times China shares tumbled after they announce equity raising to reduce debt.
China's currency also weakened sharply, logging its biggest one-day loss against the dollar since June 17, 2021 as higher U.S. yields lifted the greenback .
"The key takeaway is that the rate hike cycle (in the U.S.) is about to start," Philip Wee, Senior FX Strategist at DBS Group wrote.
The market, which had turned neutral ahead of Fed meeting, is now bracing for a more aggressive frontloading of rate hikes, he added. Federal funds futures now price in as many as five rate hikes this year. [FEDWATCH]
The yuan fell roughly 0.7% against the dollar at the end of domestic trading session, after the People's Bank of China set a sharply weaker midpoint rate at 6.3382 yuan per dollar, versus 6.3246 a day earlier. It was the biggest weakening in the the daily mid-rate fixed by the central bank since Dec. 20.
(Reporting by Andrew Galbraith, Samuel Shen and Jason Xue; Editing by Simon Cameron-Moore and Shailesh Kuber)
