Chinese shares fell to their lowest in almost four years on Wednesday, pulling down the Hong Kong market, as hopes of monetary easing anytime this year faded in the light of improving economic data.
A lack of progress on U.S. budget talks also weighed on markets, reigniting fears of a fiscal crisis in the world's largest economy.
The Hang Seng Index went into the midday trading break down 0.8%, while the China Enterprises Index of the top Chinese listings slid 1.5%. Midday turnover stayed weak, as it had for most of November.
In the mainland, the CSI300 Index and Shanghai Composite each slid 0.7%, with the latter going into the lunch break at 1,977.4, its lowest intra-day level since January 2009.
"This isn't panic in the A-share market, but a systematic, slow downward grind," said Hong Hao, head of China research at Bank of Communications International Securities.
Hong added that industrial profit data on Tuesday gave further evidence that China's economy was improving, dousing hopes of further monetary policy easing for those still expecting the A-share market will rebound into year's end.
"But they are waking up now, cutting their losses and getting out of the market, especially with the bumper crop of lockup expiry coming up in December, which will further decrease market volumes and result in more weakness," Hong said.
Cyclical sectors such as steel and industrials that would benefit the most from stimulus measures fell sharply as investors discounted such a step.
Baotou Steel dived 5.3% in Shanghai to its lowest since early September. Shares of gold miners were also weak on declining gold prices, with Zijin Mining down 0.6% in Hong Kong and 2.4% in Shanghai.
The China banking sector was also broadly weaker and were among the top drags on the Hang Seng Index. Industrial and Commercial Bank of China (ICBC) shed 1.3%, while China Construction Bank (CCB) slid 1.9 percent.
A-share proxy plays such as Chinese insurers and brokerages were also weak. China Life Insurance was down 2% in Hong Kong and 0.3% in Shanghai. Citic Securities lost 1.6% in Hong Kong and 1.3% in Shanghai.
CHINA OIL MAJORS WEAK
Shares of Chinese oil majors were also a key drag as oil prices declined. CNOOC Ltd slipped 2.1%, while China Petroleum & Chemical Corp (Sinopec) lost 1.2% in Hong Kong and 0.3% in Shanghai.
China's state-owned CNOOC Ltd and its Canadian takeover target Nexen Inc said on Tuesday they withdrew and resubmitted their application for U.S. approval of their $15.1 billion deal, as Canada gets close to a crucial decision on whether to approve the transaction.
A spokesman for the Canadian Prime Minister did not comment on a report that the federal government might want CNOOC to sell the 7% stake that takeover target Nexen holds in the large Syncrude oil sands joint venture, because fellow Chinese company Sinopec has a 9% stake in it.
