Shares in China and Hong Kong were lower by midday on Tuesday as a stronger dollar prompted investors to dump metals and mining issues, while Hong Kong developers extended losses on government property curbs.
Investors, already edgy from Beijing's efforts to ease inflation, were also nervous about the debt crisis in Ireland that could spread to other parts of Europe.
"The market remains defensive and will be unsettled until year-end," said Howard Gorges, vice-chairman at South China Financial Holdings. "We have a messy Europe and in addition we have this uncertainty on whether there will be another rate increase in China and where tightening measures will lead."
The Shanghai Composite Index fell 2.49% to 2,812.55 points, trading sharply below its 250-day moving average, now at 2,886 points, and near a six-week low.
Analysts suggested recent falls may be overdone, with the 14-day Relative Strength Index (RSI) trading at 38, indicating the Shanghai Composite is now heading for technically oversold territory at a reading of 30.
Retail investors, who account for more than two-thirds of turnover, piled into the stock market in October, sending volume to multi-year highs.
In November, however, there has been a swift turnaround, with an exodus from large-cap banks and property issues, as the government steps up measures to control escalating inflationary pressures.
"The market is in a depressed state with expectations of further tightening policies, but as measures continue to be rolled out, there will be fewer attacks on the stock market as they become more familiar to investors," said Guo Yanling, analyst at Shanghai Securities.
Western Mining Co, one of the biggest losers on the Shanghai index, slumped 6.5%, while zinc manufacturer Zhuzhou Smelter Group Co dropped 6.8%. Gold miner Zijin Mining Co dropped 5%.
Oil giant China Petroleum & Chemical Corp (Sinopec) fell 2.1% and was the biggest drag on the overall index given its size.
Concerns about energy and mining plays were fuelled by an order from the National Development and Reform Commission, the powerful central planning agency, that coal miners stabilise prices after the price of domestic coal surged 11% from September.
China Everbright Bank Co fell 3.1%, Agricultural Bank of China was 1.5% lower, and Citic Securities Co, the country's biggest brokerage, slid 3.9%.
Turnover of Shanghai A shares slipped to 79 bln yuan from 87 bln yuan on Monday morning. Volume has dropped from multi-year highs hit in October's liquidity-fuelled rally, with investors haunted by the nearly 30% drop in the index that happened after an initial round of tightening in the spring.
Investors have started to selectively position themselves in small cap shares likely to gain from government support.
Chongqing Changan Automobile Co gained 4.% , after saying it planned to invest about $650 mln in a plant in Beijing.
HK DEVELOPERS LOSSES
Investors continue to unload local developers on expectations their earnings would be hurt by the imposition of a new stamp duty on residential transactions and other government measures to stem fast-rising real estate prices.
The property sub-index dropped 2.56%, underperforming the broader market. The benchmark Hang Seng Index was down 1.79% at 23,103.63 at the midday trading break.
After outpacing the Hang Seng Index in the last two months, the property sub-index is now lagging behind the HSI.
"The selloff in the property sector will continue for a while," said Steven Lam, vice-president at Karl Thomson Securities. "Most of the stocks are still quite expensive."
Bigger developers Sun Hung Kai Properties, Hang Lung Properties and Swire Pacific were much more expensive than their peers.
Sun Hung Kai trades at 15.4 times forward 12-month price-to-earnings compared with the average 11.1 times for the sector, according to Thomson Reuters Starmine data. Swire Pacific is trading at 15.8 times and Hang Lung at 21.4 times.
Sun Hung Kai was 1.9%, while Hang Lung fell nearly 2.9% and Swire was off 0.2%.
