Shanghai shares extended losses on Wednesday, following a slump driven by tight market liquidity as a major initial public offering loomed. The benchmark index was on course to post a nearly 27% decline for the first half of the year.
Shares in Hong Kong also fell ahead of a public holiday on Thursday, with the benchmark Hang Seng Index down 0.59% or 119.6 points by midday to 20,129.30, dragged lower by weakness in mainland markets.
"Everybody is sort of on the edge right now, but there was no sign of panic selling, to be honest," a trader at a European brokerage based in Hong Kong said.
With the second quarter ending and ahead of a slew of important data from major economies around the world, investors wanted to lock in profit wherever they could, the trader said.
The Shanghai Composite was down 1.0% by midday, on very thin volume, to a fresh 14-month intraday low with property shares falling.
On Tuesday, A-shares had plummeted more than 4% as tight liquidity in the local market forced investors to sell to make room for Agricultural Bank of China's initial public offering.
The sharp slide took the index into oversold territory with the relative strength index falling below 30.
In Hong Kong, defensive sectors such as utilities and telecoms plays outperformed.
Foxconn International Holdings fell 6.9% after the company's fifth consecutive profit warning on the back of weaker pricing and higher depreciation expenses.
Foxconn shares are down about 44% so far this year, as the company struggles with a wave of labour unrest in China, where increasingly assertive migrant workers are calling for better conditions and higher pay.
BOTTOMING OUT?
In coming days, China will report data for manufacturing activity in June, the United States will report its latest jobs data and the Bank of Japan will release its closely watched tankan survey on corporate confidence.
China's Purchasing Manager's Index for June likely eased in June for the second month in a row, but is expected to remain well above the boom-bust line of 50. Fears of an economic slowdown in China and worries over its tightening policies to control inflation have contributed to make equity markets on the mainland among the worst performing in the world, second only to Greece.
However, funds were seen returning to Chinese equities through June and some analysts said the selloff was overdone and the markets were poised for gains for the year heading into the second half.
"The market may be too pessimistic about the economic outlook for China, given that the government still has many choices to ensure the economic slowdown is gradual" Julius Baer said.
The latest data from fund-tracking firm EPFR for the week ending June 25 shows net inflows into China equity funds for the sixth consecutive week.
The forward 12-month price to earnings multiple for the Shanghai A-share index is about 14.7, compared with 23.64 in December 2009 and at its lowest in over 16 months.
