Hong Kong shares touched their lowest in nearly two weeks early on Thursday, as losses deepened for Chinese financials after more media reports emerged about possible sector reforms from a key Communist Party policy meeting starting this weekend.
A newspaper controlled by the People's Bank of China said on Thursday that regulators were working on fresh restrictions on interbank market activity in the next step of their crackdown on shadow banking.
"In the short term, this is a negative, partly also because there's been so many media reports on possible financial sector reform and all they've done is to fan uncertainty," said Linus Yip, a strategist at First Shanghai Securities.
By midday, the Hang Seng Index was down 0.7 percent at 22,884.5 points, its lowest since Oct. 29. The China Enterprises Index of the top Chinese listings in Hong Kong shed 0.8 percent.
The CSI300 of the leading Shanghai and Shenzhen A-share listings and the Shanghai Composite Index each slipped 0.3 percent as midday volume on the Shanghai bourse neared multi-month lows.
In both Hong Kong and Shanghai, two stocks declined for every stock that advanced in the morning session.
The marginal outperformance of the onshore market was largely due to a rebound in the financial A-shares as the sector's H-shares again sank. China Minsheng Bank slid 1.3 percent and is now down 4.2 percent on the week so far.
Minsheng's H-shares were among the most highly shorted in Hong Kong on Wednesday after the 21st Century Business Herald reported that the banking regulators are planning to cap the exposure of commercial banks to non-tradeable credit-backed assets backing inter-bank assets and proprietary investment.
A similar report was carried by the Chinese central bank-controlled Financial News on Thursday, suggesting tri-party lending agreements in the interbank market may be banned.
Still, markets have been trending lower as turnover thinned since the start of November as investors await the outcome of a closed-door meeting of the elite Central Committee of China's ruling Communist Party from Nov. 9-12 to set the country's economic agenda for the next decade.
Still, traders said some short money was beginning to buy H-share index options and some Chinese banking names to protect against a post-meeting rally.
Beijing is also due to post a slew of October economic data starting with trade on Friday and inflation, urban investment, industrial output and retails sales on Saturday. Money supply and loan growth are due between Nov. 8 and 15.
On the earnings front, Macau casino operator Galaxy Entertainment and Lenovo Group each rose 0.4 percent ahead of their respective quarterly announcements later in the day.