SHANGHAI stocks posted their biggest daily loss in nearly four years yesterday as it appeared the central bank was holding back on bailing out financial institutions suffering a liquidity squeeze.

The looming resumption of initial public offerings and the weakness of the economy also eroded market sentiment, market watchers said.

The key Shanghai Composite Index fell 5.30 percent to close at 1,963.24 points, the largest daily decline since August 31, 2009, when the index dropped by 6.74 percent.

A composite index starting with the number "1" triggered black humor among depressed investors who compared the A-share market to the Chinese national football team, which disappointed fans when Thailand beat them 5-1 in an international friendly earlier this month.

"Chinese soccer fans are no longer lonely in despair because now they have company of Chinese A-share investors," said one investor.

"The most miserable Chinese are those who watch the Chinese football team at night and buy Chinese shares during the day," said another.

Analysts blamed the recent liquidity crisis.

"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 hurt the growth of the real economy," analysts with HSBC Jintrust Fund Management Co Ltd said in a report yesterday.

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

Barclays said the central bank is likely to stay firm with the central government in a move to promote deleverage and rebalance economic growth into a sustainable model. It said short-term lending costs are expected to remain high, which may pose risks for small and middle-sized lenders.

A gauge of domestic financial institutions shed 7.6 percent yesterday. Industrial Bank Co slumped by the daily limit of 10 percent to 13.89 yuan. China Minsheng Banking Corp dropped 9.9 percent to 8.51 yuan.

Hong Hao, chief strategist at BOCOM International Holdings, said "the A-share market is likely to fall another 20 percent amid an outflow of speculative funds."

Sentiment has also been dented by speculation that China's securities regulator will soon resume approvals for new share listings on domestic stock exchanges as it has finished public consultation on a draft IPO reform.

China has not approved any new share offerings since November amid its fight on false disclosures and profit manipulations. At the end of May, there were 666 companies lined up to launch IPOs.

Analysts expect the market will usher in a group of new share offerings as soon as the IPO is restarted from an eight-month suspension because new IPO rules will allow issuers to decide the timing of new offerings.

The Shanghai Composite has slumped 20 percent from this year's high in February as economic recovery began to lose momentum due to weak demand.

Data from HSBC Holdings last week suggested manufacturing activity may have contracted in June to a nine-month low.

"The performances of firms are challenged amid economic weakness and blue-chip stocks are expected to post declines in profits in their mid-year reports," said Qian Qimin, an analyst with Shenyin Wanguo Securities.

"Currently, investors have lost confidence in the stock market due to a lack of favorable news."