Liquidity squeeze bleeds equities

Jason Yue, senior analyst with an investment company in Shanghai, said the market was expecting an injection of liquidity by the central bank.

Yue said it appears authorities want to maintain a prudent position and reduce leveraged operations.

Premier Li Keqiang said at a State Council meeting last week that banks must make better use of existing credit, and step up efforts to contain financial risks.

Rating agency Moody's Investors Service said in a report on Monday that the government was doing the right thing.

"We think it is prudent for China to curb its credit growth to more sustainable levels to prevent a buildup of excessive leverage. Therefore, we regard China's latest moves as credit positive for the health of the Chinese banking system overall," said the report.

But it said banks hold significant amounts of assets that theoretically could be used to obtain liquidity from the People's Bank of China.

"We think it is unlikely that the PBOC would allow systematically important banks to get into serious and sustained liquidity problems," said the report.

"Small and medium-sized banks are likely to aim to strengthen their liquidity buffers by competing more aggressively for deposits to reduce dependence on the interbank market, which will reduce net interest margins and curtail lending growth."

Share prices of several banks dived on Monday. Ping An Bank plunged to the daily loss limit of 10 percent, hitting 10.15 yuan ($1.65) per share before trading was suspended. Industrial Bank also lost 10 percent on Monday to 13.89 yuan per share.

China Minsheng Banking Corp Ltd lost 8 percent to 7.22 yuan per share.