SHANGHAI (AFP) - Chinese shares slumped by 5.30 per cent on Monday as authorities refused to pump fresh money into the financial markets despite a growing cash crunch that is squeezing banks, dealers said.
The benchmark Shanghai Composite Index lost 109.85 points to 1,963.24 on turnover of 88.0 billion yuan ($18.3 billion), the weakest close since December 3, 2012 when the index ended at 1,959.77 points.
The loss was the largest single-day decline since August 31, 2009, and came after the central bank on Monday published a note sent to lenders last week calling on them to strengthen liquidity management, which analysts said may indicate its unwillingness to provide any cash in the near term.
"Currently, overall liquidity in the domestic banking system is at a reasonable level," the People's Bank of China (PBoC) said in the note dated June 17 and that was issued to banks across the country.
"All financial institutions must continue to adhere to a prudent monetary policy... and continue to strengthen liquidity management and promote stable monetary environment," it added.
The statement came a day after a commentary was published by the state-run Xinhua news agency that also indicated the government is unlikely to pump cash into its banking system in order to contain financial risks.
"There's no shortage of funds, it's just the funds were placed in wrong areas," Xinhua said in a report over the weekend.
It blamed speculation and non-bank forms of lending, often called "shadow finance", for the problem.
The cash squeeze has seen banks put the brakes on new lending, which has in turn dragged on the economy.
China's economy, a crucial driver of global growth, expanded 7.8 per cent in 2012 - its slowest pace in 13 years - and recorded a surprisingly weak 7.7 per cent expansion in the first quarter this year, well below forecasts.
Goldman Sachs on Monday revised down its forecast for China's economic growth to 7.4 per cent from the previous 7.8 per cent for 2013, citing tight liquidity in the banking system.
"The recent tightening of the interbank market has sent a strong policy signal that the strong credit growth earlier in the year will likely not continue," it said in a research report.
"The liquidity tightening is another indication that the new government has put priorities on tackling the structural problems," Goldman Sachs added.
The rates banks charge to borrow from each other have surged in the past two weeks and jumped into double figures on Thursday before easing on Friday amid reports the PBoC had injected cash into several lenders.
However, the latest announcement suggests it is unwilling to make any new moves.
"The central bank... will likely just sit out and let the banks sort out their own problems, so the situation with the liquidity crunch is unlikely to change unless there's any sign of monetary loosening," BOC International analyst Shen Jun told AFP.
Amid the heavy sell-offs triggered by the liquidity squeeze, financial stocks were hardest hit in the Shanghai stock market on Monday.
Southwest Securities slumped by its 10 per cent daily limit to 7.81 yuan, Pudong Development Bank tumbled 9.18 per cent to 7.52 yuan and Ping An Insurance lost 7.03 per cent to 34.50 yuan.
Coal miners and metal producers were also lower.
Yangquan Coal Industry fell by its 10 per cent daily limit to 8.90 yuan while Datong Coal Industry dropped 8.93 per cent to 6.02 yuan.
Baotou Steel Rare-Earth dived 9.64 per cent to 21.93 yuan while Rising Nonferrous Metals slumped 9.04 per cent to 35.61 yuan.
The instability in China has had a knock-on effect around other markets, with Hong Kong shares sinking 2.22 per cent, while Sydney - where several firms rely on Chinese growth - slipped 1.47 per cent.