Shares in Shanghai and Hong Kong were lower by midday on Monday as investors dumped banking issues amid lingering concern over official steps to cool a liquidity-driven asset price rally.
Investors unloading stocks in regional markets added to downbeat sentiment. IFR reported that major shareholders sold more than $1.9 bln in Asian equities last week.
The Shanghai Composite Index eased 0.63% to 2,966.75 after posting its biggest percentage loss in 14 months last Friday on market talk that the central bank was preparing to raise its policy rate.
Financials, dominated by banks, were the morning's biggest drag on the index. Four banks were among the most actively traded stocks and sharply underperformed the broader market.
Top lender Industrial and Commercial Bank of China dropped 3.9%, while China Construction Bank Corp, which saw its A shares go ex-rights on Monday, plunged 6.5%.
In a sign that investor interest in stocks is waning, turnover of Shanghai A shares tumbled to 113 bln yuan ($17 bln) from Friday morning's 164 bln yuan. Daily turnover hit a record high of nearly 300 bln yuan in recent sessions.
"Recent rises in commodities stocks were really crazy, betraying the stock market's rally since early October, which was mostly driven by an excess of liquidity," said Chen Huiqin, senior analyst at Huatai Securities in Nanjing.
Among feverish signs, the official China Securities Journal said on Monday that a surge in cotton prices had pushed many Chinese textile and garment companies to the brink of bankruptcy.
The China Business News said soybean and edible oil prices defied an official move to sell provincial reserves and continued climbing, with huge fund flows into domestic commodity markets.
Mining companies, which dominate the listed commodities sector, were the second biggest index mover on Monday. Gold producer Zijin Mining Group the market's most active stock in the morning, falling 4.41%.
Although there was no announcement of a rate rise over the weekend, analysts said greater volatility was to be expected for the index heading toward year-end as the authorities take steps to keep liquidity in the financial system in check, including last week's increase in bank reserve requirements.
"No authority in the world would tolerate such a fever, and an imminent interest rate rise after recent bank reserve increase is still very likely," said a trader at a Shanghai securities house.
Traders and analysts said they expected volatile trading in Shanghai in coming sessions, with longs and shorts battling for control over market direction.
In the short term, the index should find support at its annual 250-day moving average, now at 2,893 points, while its ceiling is seen at its recent peak of 3,186, hit last Thursday.
In a rally that has not seen much of a correction and is driven mainly by strong market flows, the Shanghai Composite has jumped nearly 20% since early October before its tumble on Friday.
BANKS, COMMODITIES DOWN
Banks and commodities dragged the Hong Kong stock market lower, as investors continued to worry that Beijing may implement more tightening measures such as capping bank loans, raising reserve requirements and interest rates to cool the economy.
The benchmark Hang Seng Index was down 0.67% at 24,059.66 by the midday trading break, extending Friday's slump when the index posted its biggest single-day loss in more than four months.
"The cautious sentiment continues," said Ben Kwong, chief operating officer at KGI Asia. "The Chinese government seems to be quite tough in its stand in guarding against inflation. Investors expect another rise in reserve requirements and maybe some administrative cap on lending."
Industrial and Commercial Bank of China fell 2.1% and China Construction Bank Corp lost 1.4%.
Commodities plays extended losses amid a rise in the U.S. dollar and concern that slower Chinese growth may cut demand for coal, energy and metals. China Coal Energy Co fell 3.4%, Aluminum Corp of China lost 3% and PetroChina Co slipped 2.3%.
Bucking the trend, Longrun Tea Group Co surged 14.5% after it issued an upbeat earnings outlook.
