A CASH shortage among banks made the Chinese stock market one of the world’s worst performing last year, showing how tens of millions of small investors remain at the mercy of government policy.

    In June and again in December, a liquidity squeeze sparked worries over China’s broader economy and hit the stock market — but the funding crunches were widely seen as engineered by authorities keen to impose tighter financial discipline over banks.

    Combined with a tepid rebound in the economy — the world’s second largest — and worries over a resumption of new share offers flooding the market, Shanghai’s stock index closed Tuesday down 6.75 percent for the year.

    “Instability in the financial system and expectations that authorities would maintain a tight balance in its monetary policy led to some volatility in the market,” said BOC International analyst Shen Jun.

    In comparison, Tokyo’s Nikkei 225 index soared 56.7 percent over the year. In New York, the broad-based S&P 500 had surged 29.1 percent by Monday — having tapped several record highs — while the CAC 40 in Paris gained 17.4 percent despite the French economy’s woes.

    Even the Hang Seng Index in Hong Kong rounded out the year up 2.87 percent.

    China’s central bank has shown reluctance to inject extra liquidity into the interbank market as it fends off potential risks to the financial system and clamps down on shadow banking that resulted in excessive credit, analysts said.

    The moves have caused spikes in the rates at which banks borrow from each other, with the effects spilling over to the stock market.

    On June 24, the Shanghai Composite Index tumbled 5.3 percent, the biggest single-day decline since August 2009, after the central People’s Bank of China (PBOC) initially shunned injecting liquidity before eventually relenting.

    Similar worries also plagued the market in December, sending the Shanghai index down 6.9 percent over a nine-day losing streak, until the PBOC intervened to add funds.

    The central bank said Tuesday it would maintain an appropriate level of liquidity while repeating its embrace of a prudent monetary policy, according to a statement on its fourth-quarter meeting.

    “The stock market has always been sensitive to each and every move of policymakers,” said Central China Securities analyst Zhang Gang.

    Similarly, China’s authorities hold the power to decide which firms can launch initial public offerings (IPOs) and when they go to market, an example of the control the State retains over many parts of the economy.

    China’s stock regulator suspended approvals for IPOs for more than one year to alleviate the pressure of an oversupply of shares and prepare for reforms to the listing system.

    On Tuesday, five companies said they had received permission to raise a combined 2.1 billion yuan (US$347 million), ending the lengthy freeze.

    The China Securities Regulatory Commission has said it will give the market a bigger say in the listing mechanism, after authorities pledged at a key meeting in mid-November to let market forces play a more “decisive role” in the economy. (SD-Agencies)