* HSI -1.3 pct, H-shares -1.6 pct, CSI300 -2.8 pct
* HK property hit by bad weekend sales, rising Treasury yields
* Growth plays hurt, China pledges action on industrial overcapacity
* Zijin Mining dives in heavy volumes after profit warning
China shares had their worst day in two weeks on Monday, with Hong Kong markets also weaker, after Beijing pledged to cut off credit to industries plagued by overcapacity.
The Hong Kong property sector was hit by poor weekend sales, rooted in fears of higher interest rates after Treasury yields touched two-year highs. Solid U.S. jobs data on Friday had spawned expectations the Federal Reserve may soon pare its stimulus.
In their worst daily losses since June 24, the CSI300 of the leading Shanghai and Shenzhen A-share listings skidded 2.8 percent, while the Shanghai Composite Index sank 2.4 percent.
The Hang Seng Index fell 1.3 percent to 20,582.2, and the China Enterprises Index of the top Chinese listings in Hong Kong slid 1.6 percent. Both were down as much as 3 percent in early trade.
Hong Kong turnover was 22 percent below average. But short selling interest stayed high, accounting for 12.1 percent of turnover versus a historical 8 percent average.
"The money in the market is very short-term right now. Most investors have given up hope for any stimulus from Beijing, but now it seems China could be rolling out stricter ground rules to aid the restructuring of the economy," said Jackson Wong, vice-president for equity sales at Tanrich Securities.
In a statement Friday, the State Council laid out plans to ensure banks support the kind of economic rebalancing China's leadership wants as it focuses on high-end manufacturing and ending dependence on extravagant investment funded by cheap debt.
Shares of companies with high gearing fell. China National Building Material (CNBM), among the larger Chinese cement producers, sank 4.5 percent to test 21-month lows.
CNBM reported a net gearing of about 409 percent in the first quarter, according to Nomura, with its total net debt almost 130 billion yuan. It was one of two state-owned firms to drop A-share IPO plans in June because they did not meet stringent new accounting requirements.
Zijin Mining lost 7 percent in Hong Kong after warning interim profit could decline by up to 55 percent. Its Shanghai listing sank 4.1 percent.
Shares of China Rongsheng Heavy Industries, the largest private shipbuilder, fell more than 10 percent for a third day, plunging 11.2 percent to a record low.
Rongsheng appealed for financial help from the government and big shareholders on Friday after cutting its workforce and delaying payments to suppliers.
In Hong Kong, according to BNP Paribas, secondary property market sales stayed weak and only 18 units were sold in the primary market this weekend, 75 percent fewer than the previous one.
New World Development fell 2.4 percent and Hang Lung Property dived 3.8 percent. Link REIT shed 0.7 percent.
CHINA POLICY CONCERNS
The Chinese banking sector was also hurt on Monday by an official China Securities Journal report that the central bank is likely to unveil measures to liberalize interest rates this year - a move that could cut net interest margins.
The report suggested there will be no easing of policy, calling market liquidity "sufficient" and deposit growth "positive" while referring to June's interbank liquidity squeeze as a stress test ahead of reforms.
Also hurting sentiment were mainland news reports that initial public offering approvals may resume by early August, which could mean more competition for limited liquidity.
China Construction Bank (CCB) fell 2.1 percent in Hong Kong, deepening 2103 losses to almost 16 percent. Its Shanghai listing shed 1.4 percent.
Losses came ahead of a slew of Chinese economic data. June inflation is due on Tuesday and trade on Wednesday, with loan growth and money supply data expected by July 15.
The median forecast of 21 economists polled by Reuters show China's economy in April-June likely grew 7.5 percent from a year ago, slowing from the previous quarter. Second quarter GDP data is due on July 15.