SHANGHAI stocks extended yesterday's big losses in the morning session, with the benchmark index falling below the 1,900-point support level, as investors feared for a liquidity crisis.

The Shanghai Composite Index dropped by 74.55 points, or 3.80 percent, to 1888.68. Turnover was 50 billion yuan (US$8.2 billion) by the noon break. The index slumped 5.3 percent yesterday, the biggest single-day loss since August 2009.

"The market tumbled on panic selling caused by a liquidity squeeze," said Gui Haoming, chief analyst at Shenyin & Wanguo Securities.

"The market is expected to drop further because the liquidity condition is unlikely to improve in the short term as the central bank seems to hold back from injecting cash," Gui said.

The People's Bank of China, the central bank, said yesterday that liquidity in China's banking system is at a reasonable level and urged commercial banks to improve their liquidity management. The statement is read as a sign that the central bank would not inject more cash into the money market in the near term.

Financial institutions continued a weak run. China Minsheng Banking Corp plunged 9.9 percent to 7.67 yuan, after a 9.9 percent drop yesterday. Industrial Bank slumped 5.7 percent to 13.10 yuan.

CITIC Securities, China's biggest brokerage, lost 5 percent to 9.59 yuan. Haitong Securities slid 8.1 percent to 8.50 yuan. Founder Securities fell by the daily limit of 10 percent to 5.30 yuan.