A cash shortage among banks made the Chinese stock market one of the world's worst performing this year, showing how tens of millions of small investors remain at the mercy of government policy.
In June and again in December, a liquidity sueeze sparked worries over China's broader economy and hit the stock market -- but the funding crunches were widely viewed 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 persistent uncertainty over a resumption of new share offers flooding the market, Shanghai's benchmark stock index had dropped 7.56 percent in 2013 by the close Monday, the year's penultimate trading day.
"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," BOC International analyst Shen Jun said.
In comparison, Tokyo's Nikkei 225 index soared 56.7 percent over the year, 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, which is strongly exposed to the Chinese economy, is up 2.6 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 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 theeconomy.
China’s stock regulator has 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.
The China Securities Regulatory Commission has said it will give the market a bigger say in the listing mechanism, after the Communist authorities pledged at a key meeting in mid-November to let market forces play a more "decisive role" in the economy.
But some market participants are sceptical about reforms, saying the government is loath to completely surrender control and describing the IPO change as window-dressing.
"It appeared to be a market-led reform but the substance still implies (government) administration," said an analyst at a Shanghai brokerage, who declined to be named.
The regulator has announced it will let investors assess the value and risks of IPOs, but stressed that it will retain "oversight" of stock offerings and information disclosure by companies.
The Shanghai broker said the new rules were "like throwing cold water on the market, dealing a heavy blow to those who had overly high expectations towards reforms".
Weakness in the stock market came despite China's domestic growth expanding 7.8 percent year-on-year in the third quarter of 2013, snapping two quarters of slowing growth. But recent economic data has sparked worries the rebound might not be sustainable.
Authorities have called for a structural adjustment in the economy, curbing traditional sectors such as resources and manufacturing and giving more support for emerging industries. But analysts say those plans have hit shares that are heavily weighted in the Shanghai index.
"Looking ahead, the main board will likely drift with the macro-economy with no drastic gains or declines,” said Zhang of Central China Securities.
China's stock market rose a mere 3.17 percent in 2012, and the weak returns have prompted local investors to seek alternative investment channels, facing a lack of choices since they are not allowed to invest directly overseas.
Instead they have sought better returns in property, weakly regulated wealth management products offered by banks -- and even the volatile virtual currency Bitcoin.