China, HK shares slide after PBOC tightens; banks hit

HONG KONG/SHANGHAI, Jan 13 (Reuters) - Shares in China and Hong Kong fell on Wednesday, led by banks and property stocks, as investors fretted that China's surprise reserve requirement increase could cool growth in the world's third-largest economy.

China's benchmark Shanghai Composite Index .SSEC closed down 3.09 percent on Wednesday in its biggest single-day percentage loss in seven weeks. The index finished at 3,172.658, its lowest close since Dec. 25.

Hong Kong's benchmark Hang Seng Index .HSI fell 2.59 percent or 578.04 points at 21,748.60, its worst one-day percentage loss in six weeks.

Turnover in Shanghai A shares was a relatively heavy 197 billion yuan ($28.9 billion), the highest since Dec. 4, with losing stocks outnumbering gainers by 652 to 245.

In Hong Kong, market turnover rose to HK$97.62 billion ($12.59 billion), the highest since Nov. 27, from Tuesday's HK$81.22 billion.

The decision by the People's Bank of China on Tuesday to increase bank reserve requirements could signal an end to easy and cheap funding, putting pressure on the earnings of Chinese property and resources companies. [ID:nTOE60C02N]

The surprise move is the strongest step to date by the central bank as it starts to normalise monetary policy from very loose conditions, with an eye towards reining in surging asset prices.

"This is the first reaction from China on the bubble forming. The impact is pretty big this time, but China has been working hard to maintain its economic growth. They won't want to derail it," said Jackson Wong, investment manager at Tanrich Securities.

The reserve requirement rise came earlier than most traders and analysts had expected, and was accompanied by an official campaign to keep asset prices in check, in part by approving more initial public offerings. [ID:nTOE60B08S]

Chinese banks fell, with ICBC (1398.HK) (601398.SS), the world's largest lender by market capitalisation, extending early losses. Its Shanghai shares were down 4.68 percent, while its Hong Kong shares fell 3.58 percent to three-month lows.

China Construction Bank (0939.HK) also hit a three-month low, shedding 3.89 percent in Hong Kong, while Bank of China (3988.HK) was down 3.62 percent at a three-week low.

Property stocks, a sector that has become an increasing focus of Beijing's efforts to stamp out runaway price rises, also dropped as an official vowed renewed attempts to curb speculation. [ID:nTOE60C032]

China Overseas Land (0688.HK) fell 4.73 percent to a four-month low, and China Resources Land (1109.HK) dropped 6.59 percent to a six-month low. The country's biggest property company, China State Construction Engineering Corp (601668.SS), lost 1.96 percent.

But analysts said extended steep sell-offs of banks and property issues were unlikely, adding that the stocks would possibly consolidate at current levels. Some also said the PBOC move could help to stabilise the banking system.

"I do think they are reasonably priced right now (at 12-14 times P/E). But since China is indicating that they are tightening up, I don't think the banks will make a big run-up anytime soon," Wong said.

Other sectors pegged tightly to China's economic growth and building boom, such as resources, also took a hit. Aluminum Corp of China Ltd (Chalco) (2600.HK), the country's largest aluminium maker, was down 7.03 percent.

China Shenhua Energy (1088.HK), the nation's largest coal producer, slipped 3.54 percent.

(For details on stocks seeing big moves in Shanghai and Hong Kong, click on [ID:nTOE60C03L] and [ID:nTOE60C02H])

REPEAT OF LAST AUGUST UNLIKELY

"The quicker-than-expected tightening is partly aimed at curbing excessive imports, while global commodity prices are at high levels," said Ren Chengde, senior stock analyst at Galaxy Securities in Shanghai.

"In addition, it is a continuation of the official clampdown on domestic asset prices, including property and shares, over the past month. The clampdown is aimed at checking heavy capital inflows as China's economy shows solid signs of recovery."

The central bank's move on Tuesday, which followed a ramping up of bill yields and a withdrawal of liquidity from the banking system, recalls a tightening process last July and August that involved pushing up central bank bill yields by 26 basis points but did not include increases in reserve requirements.

In response to that campaign, the Shanghai Composite Index fell more than 20 percent at one point from its 2009 high of 3,478 points hit on Aug. 4, raising the question of whether the market could take a hit of similar magnitude this time around.

"I don't think this will trigger the sell-off (that we saw in August). China will take it slowly from here," said Wong with Tanrich Securities.

The Shanghai index has also been supported by market reforms, such as the launch of stock index futures and short selling, which indicate that authorities are reluctant to see any massive instability in the market.

"The fundamentals aren't the same as before (last August)," said Steven Lam, vice-president at Karl-Thomson Securities. "The tightening signals that the economy is recovering and the markets can bear the increase in the reserve requirement ratio."

"Fund managers are doing some switching now," he said. "The consumption staples have only dropped a bit. They have very strong buying power, showing that capital is staying in the market." (Writing by Jason Subler and Sui-Lee Wee; Editing by Chris Lewis)

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