China's key stock index held up better than expected following a surprising reserve ratio hike just before the week-long Lunar New Year break and following U.S. policy moves. It closed down 0.49 percent in thin volume, led by banks.
In Hong Kong, turnover was at HK$43.9 billion ($5.65 billion), hovering near one-month lows, versus Friday's HK$42.89 billion, suggesting that most investors were taking a wait-and-see attitude, worried about further monetary tightening measures from China and the United States.
People are still extremely cautious, said Alex Wong, director at Ample Finance Group. They are not convinced that the market will move up sharply from here.
Unless we see some clear direction, it's better to stay put because in a thin market, movement can be quick, he said. People have to wait for more fundamental bullish reasons before they can act.
The benchmark Hang Seng Index <.HSI> ended up 2.43 percent or 483.25 points at 20,377.27, posting its biggest one-day percentage gain in more than two months.
I think it's going to be tough to challenge the 21,000 level, said Alfred Chan, chief dealer at Cheer Pearl Investments. The direction is not clear cut. People are uncertain about the strength of the U.S. dollar, the Hong Kong dollar and liquidity in Hong Kong.
The China Enterprises Index of top locally listed mainland Chinese stocks <.HSCE> closed up 2.27 percent at 11,519.56.
Hang Seng heavyweight HSBC Holdings <0005.HK>, one of the world's leading banks, rose 3.2 percent. China's top lender Industrial and Commercial Bank of China (ICBC) <1398.HK> rose 1.5 percent, while China Overseas Land <0688.HK> gained 1.2 percent.
But all 14 banks listed in Shanghai fell.
The Shanghai-listed A shares of top lender Industrial and Commercial Bank of China <601398.SS> dropped 0.61 percent to 4.88 yuan, while Bank of Communications (BoCom) <601328.SS> was down 1.57 percent at 8.14 yuan.
BoCom is asking investment banks to submit plans for a fundraising exercise estimated at 25 billion yuan ($3.7 billion) to bolster its stretched balance sheet, a Hong Kong newspaper reported last week.
The Shanghai Composite Index <.SSEC> ended at 3,003.398 points compared with 3,018.133 at the close on Feb. 12, the last trading day ahead of the break. It edged up as much as 0.28 percent in the morning to a four-week intraday high.
The market is reacting to increasing signs of normalisation of China's economic policy, with banks particularly hit by official quantitative tightening steps, said a senior trader at a major Chinese brokerage in Shanghai.
The market won't be able to perform strongly in the near term. It is more likely to fall steadily and possibly slowly.
Losing Shanghai A shares outnumbered gainers by 461 to 416 on thin turnover of 78 billion yuan, although that was up from 67 billion yuan on the last trading day before the break.
Wen Lijun, analyst at Nanjing Securities, said the index was likely to be range-bound this week as the market absorbs a number of developments over the Lunar New Year, including a jump in global commodity prices.
We still see many opportunities in selected counters, including companies in provinces likely to get special support from the central government, and that will help to cap the market's downside in the near term, Wen said.
Banks were also under pressure from the latest warning by China's banking regulator in two directives over the weekend that they must not lend too aggressively but must verify that their loans are being used for the intended purpose.
Monday's star performers were firms based in provinces and regions designated as national-level economic development zones, marked for government support under Beijing's drive to build up less-developed areas and bolster domestic demand.
Forestry issue Fujian Zhongfu Industries Co <000592.SZ> was Monday's biggest gainer, jumping its 10 percent daily limit to 7.32 yuan, while Fujian Expressway Development Co <600033.SS> was the most actively traded, rising 2.61 percent to 7.48 yuan.