Shares plunge over liquidity concerns

China's key stock indices recorded the biggest daily loss in nearly four years on Monday over concerns about the liquidity crunch in the financial system and subdued strength in the world's second largest economy.

The benchmark Shanghai Composite Index tumbled 5.3 percent to end at 1,963.24, the lowest in nearly seven months, while the Shenzhen Component Index plummeted 6.73 percent to 7,588.52.

The plunge came as China's central bank on Monday urged lenders to control risks from credit expansion after the country's short-term interbank rates rocketed to unusually high levels over the past two weeks.

The Shanghai Interbank Offered Rate (SHIBOR) overnight rate, a basic gauge of interbank borrowing costs, surged to an all-time high of 13.44 percent last Thursday, fuelling widespread speculation that the central bank would step in to boost liquidity.

But on Monday, in a statement posted on its website, the People's Bank of China said the country's liquidity remains "at a reasonable level," signalling no intention of helping to ease the cash squeeze that investors fear will threaten the country's prolonged recovery.

"We believe this is another sign that the central bank is not willing to loosen policies or inject liquidity to bring down interest rates... and suggests that the central bank's policy stance remains tight," noted Zhang Zhiwei, chief China economist at Nomura Securities.

While central bank's stance would squeeze bubbles and eventually curb financial risks, market feared the spike in interbank rates could hurt China's banking industry which is used to excess liquidity.

"The currently tight interbank liquidity could moderate credit growth in China as interbank activities decelerate. It could also hit the profitability of banks with aggressive liquidity management", said Ritesh Maheshwari, a credit analyst at Standard & Poor's.

Moody's also warned the cash crunch may entail risks on China's slowing economy in the long run, such as hurting the interest margins of small and mid-sized banks and making loans even more difficult to get for China's private companies.

On Monday, small and mid-sized lenders were among the worst hit, with Industrial Bank Co. shedding the daily limit of 10 percent to end the day at 13.89 yuan (2.25 U.S. dollars) per share.

Ping An Bank also lost 10 percent to 10.15 yuan, while China Minsheng Bank dropped 9.95 percent to 8.51 yuan.

The panic in the stock markets reflected investors' concerns over a hard landing for the economy, according to a research note by Shenzhen-based UBS SDIC, a fund management company.

China's GDP growth unexpectedly slowed to 7.7 percent in the first quarter of 2013 from the 7.9-percent expansion logged in the fourth quarter of last year.

A string of economic indicators for April and May continued to suggest weak recovery momentum in the economy, but the government has so far refrained from introducing drastic stimulus measures.

Given the central bank's tight stance, Zhang forecast "a 30-percent probability" that China's GDP growth will drop below 7 percent in the second half of the year.

Earlier this month, HSBC cut its forecast for China's GDP growth this year to 7.4 percent, down from its previous forecast of 8.2 percent.

China's annual growth target for 2013 was set at 7.5 percent to allow leeway for proceeding with structural reforms.