SHANGHAI stocks posted the biggest daily loss in nearly four years as financial institutions continue to face a liquidity squeeze while the central bank signaled it had no intention of loosening restrictions.

The Shanghai Composite Index plummeted 5.30 percent, the largest daily decline since August 31, 2009, to close at 1,963.24 points. Trading volume was 88 billion yuan (US$14.4 billion) at the trading close.

A looming resumption of initial public offerings and overall weakness in the economy also eroded market sentiment, industry watchers said.

"The interbank market is suffering a severe cash crunch and the market slumped amid concern that the liquidity risk may spread to the shadow banking system and have an impact on the real economy," analysts with HSBC Jintrust Fund Management Co Ltd said in a report today.

Investors were further disappointed after the People's Bank of China said today that the liquidity situation in China's banking system is reasonable. It urged commercial banks to improve liquidity management, suggesting it would not inject cash into the market in the near term.

Barclays Plc said the central bank is likely to stay firm in a move to rebalance economic growth into a sustainable model. The British bank said the short-term lending costs are expected to remain high, which may post risks to small- and middle-sized lenders that rely more on the interbank financing channel.

Industrial Bank Co slumped the daily limit of 10 percent to 13.89 yuan. China Minsheng Banking Corp dived 9.9 percent to 8.51 yuan.

Market sentiment was also hit by speculation that China's securities regulator will soon resume approvals of new share listings on domestic stock exchanges after it completed public consultations on a IPO reform proposal.

China has not approved any new share offering since November in a campaign to crack down on false disclosures and profit manipulation. As of the end of May, there were 666 companies lined up to launch IPOs on the Shanghai and Shenzhen bourses, down from a backlog of nearly 900 IPO applications earlier this year.

Analysts said they expected the market will usher in a group of new share offerings as soon as IPOs are restarted because the new rules allow issuers to decide when to launch a share sale after gaining regulatory approval.

The Shanghai Composite has slumped 19 percent since February.