Mounting cash crunch worries sent mainland stocks into freefall yesterday, with the key index posting its biggest loss in nearly four years.
The Shanghai Composite Index plunged 109.86 points, or 5.3 per cent, to 1,963.24, the largest daily drop since August 31, 2009. It was also the lowest close since December 3, 2012.
The decline signalled another "Black Monday" for investors following a 4.1 per cent slide in the index last week owing to a liquidity crunch on the country's interbank market that pushed certain borrowing entities to the brink of default.
Hong Kong stocks took a hammering, too, as the Hang Seng Index slid 2.2 per cent to 19,813.98, with all but two stocks falling on the 50-member index.
Following the regional rout, the Standard & Poor's 500 was down 1.8 per cent in late morning trade in New York.
The People's Bank of China (PBOC) said in a statement yesterday that commercial lenders would be urged to take "pre-emptive" measures to manage liquidity while "invigorating existing cash", the latest sign the new mainland leadership would stand firm on their efforts to de-leverage an economy battered by increasing financial risks.
"Investors are concerned about the liquidity issue," said Shenyin Wanguo Securities analyst Qian Qimin. "A consensus among the investment community now is that the central bank wouldn't ease the monetary policy and the cash crunch would continue to wreak havoc on embattled financial institutions."
Interbank lending rates hit a record high on Thursday as a result of capital strain.
Despite appeals from institutions to the central bank to lower the banks' reserve requirement ratio and to inject cash into the system, the PBOC remained reluctant, insisting liquidity was at a reasonable level.
It was believed the statement reflected the fact that top policymakers led by Premier Li Keqiang were resolute in reining in wild credit growth and the rapid expansion of wealth management products in China's "shadow banking" system.
The 16 A-share banks accounted for more than half the profits generated by the nearly 2,400 listed companies on the mainland.
Zhang Chenghui, director of the financial research institute of the State Council's Development Research Centre, a major government think tank, told a forum at the weekend that the capital crunch resulted from excessive loan growth by the commercial banks over the years.
She said the funds, instead of going to replenish the real economy, were misused and falsely allocated to flow through the system.
The PBOC said it would continue to "fine-tune" monetary policy, which was viewed by analysts as indicating the need to balance economic growth and financial risks.
"We expect conditions on the interbank market to remain tight and nervous in the coming weeks, with repayment risk sizeable," the Royal Bank of Scotland said in a report. "We may well see some defaults on interbank loans and/or other repayment obligations in the coming months."
Reflecting the severity of the liquidity drain, the Bank of China (Hong Kong), a yuan-clearing bank in the city, will raise yuan deposits rates from 0.648 per cent to 0.75-1.05 per cent from July 1, to enhance yuan liquidity.
The financial squeeze also deterred bond sales as at least five mainland companies, including policy lender China Development Bank, shelved debt issuances worth 32.1 billion yuan, according to statements.
Additional reporting by Kanis Li