Shares in Hong Kong and Shanghai slumped Monday after Chinese authorities indicated they were unwilling to pump fresh money into markets despite a growing cash crunch that is squeezing mainland banks, dealers said.
The losses added to an already jittery atmosphere after global markets were hit by the US Federal Reserve's announcement last week that it will likely begin reeling in its stimulus programme this year.
In Hong Kong the benchmark Hang Seng Index ended down 2.22 percent, or 449.33 points, at 19,813.98 on a turnover of HK$77.41 billion (US$9.99 billion).
Shanghai's benchmark composite index slumped 5.30 percent, or 109.85 points, to 1,963.24 on a turnover of 88.0 billion yuan ($14.3 billion), the biggest loss since August 31, 2009.
Investors were sent into a panic Monday as the People's Bank of China (PBoC) ordered lenders to strengthen liquidity management, which analysts said may indicate its unwillingness to provide any cash in the near term.
"Currently, overall liquidity in the domestic banking system is at a reasonable level," the PBoC said.
"All financial institutions must continue to adhere to a prudent monetary policy... and continue to strengthen liquidity management and promote stable monetary environment," it added.
The statement came a day after a commentary from the state-run Xinhua news agency that also indicated the government is unlikely to pump cash into its banking system in order to contain financial risks.
"There's no shortage of funds, it's just the funds were placed in wrong areas," Xinhua said in a report over the weekend.
It blamed speculation and non-bank forms of lending, often called "shadow finance", for the problem.
The cash squeeze has seen banks put the brakes on new lending, which has in turn dragged on the economy.
The rates banks charge to borrow from each other have surged in the past two weeks and jumped into double figures on Thursday before easing on Friday amid reports the PBoC had injected cash into several lenders.
However, the latest announcement suggests it is unwilling to make any new moves.
"The central bank... will likely just sit out and let the banks sort out their own problems, so the situation with the liquidity crunch is unlikely to change unless there's any sign of monetary loosening," BOC International analyst Shen Jun told AFP.
China's economy, a crucial driver of global growth, expanded 7.8 percent in 2012 -- its slowest pace in 13 years -- and recorded a surprisingly weak 7.7 percent expansion in the first quarter this year, well below forecasts.
The crisis in China has had a knock-on effect around other markets, with Hong Kong shares sinking 2.22 percent, while Sydney -- where several firms rely on Chinese growth -- slipped 1.47 percent.
In Hong Kong mid-sized lender China Minsheng Banking, considered more dependent on interbank funds than larger peers, fell 8.1 percent to HK$7.22, while state-run Agricultural Bank of China fell 2.9 percent to HK$2.99 and China Construction slipped 2.1 percent to HK$5.08.
Among other losers, insurer Ping An fell 2.83 percent to HK$51.50, while HSBC fell 1.74 percent to HK$79.25. Energy giant CNOOC shed 2.99 percent to HK$12.34.
In Shanghai, Southwest Securities slumped by its 10 percent daily limit to 7.81 yuan, while Pudong Development Bank tumbled 9.18 percent to 7.52 yuan. China-listed shares in Ping An lost 7.03 percent to 34.50 yuan.
Coal miners and metal producers were also lower.
Yangquan Coal Industry fell by its 10 percent daily limit to 8.90 yuan while Rising Nonferrous Metals slumped 9.04 percent to 35.61 yuan.