Hong Kong and China shares extended losses on Thursday, led by banks and energy stocks, as weak corporate results underscored fears that the slowdown in China is hurting profitability more than expected.

The Shanghai Composite Index lost 1.4 percent to close at its lowest since Jan. 16, but finished off the day's lows as turnover stayed weak. The benchmark has now retraced more than half its gains this year.

The China Enterprises Index of the top mainland listings in Hong Kong lost 1.6 percent, while the Hang Seng Index slipped 1.3 percent, with turnover on the Hong Kong bourse staying below average.

Of the 60 percent of Chinese banks that have reported 2011 earnings, only 11 percent have missed expectations, according to Thomson Reuters StarMine. This compares favorably with the broader market, but interest in the sector has remained tepid.

Chinese banks are a proxy to growth in China and with data looking like they could slow further into the second quarter, it doesn't look like a good time to buy into the sector right now despite some really attractive valuations, said Alan Lam, Julius Baer's Greater China equity analyst.

Lam added that local government debt exposure remains a key drag, particularly for the larger state-owned banks, which are expected to back up government policy and could write off some of these debts incurred as part of the 2009 stimulus.

CNOOC Ltd led losses among Chinese oil majors, slumping 3.3 percent in Hong Kong despite posting a forecast-matching 29 percent rise in 2011 net profit, dragged by concerns over the high costs relating to production expansion.

PetroChina , Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC) were all weaker ahead of 2011 corporate earnings, each slipping between 1.6 and 2 percent.

After markets closed, PetroChina reported a 26 percent drop in fourth-quarter net profit on Thursday, lagging forecasts, as strong upstream gains were offset by massive losses in its refining segment.

ICBC, the world's most valuable lender, reported a market-beating 26 percent rise in 2011 net profit on Thursday, helped by a short supply of loans that boosted pricing and widened its net interest margin.

The Hang Seng Index and the China Enterprises Index have so far rallied 11.8 percent and 6 percent in 2012, but Chinese banks have underperformed, with Agricultural Bank of China (AgBank) down 2.1 percent.

Still, the rally has come with weak volumes, suggesting neither mutual funds nor retail investors are fully invested, and that recent weakness is the result of hedge funds shorting heavily, said HSBC China equity strategists in a report on Wednesday.

The team, led by Steven Sun, pointed that recent weakness have come amid high short turnover ratios, averaging 8-9 percent in the first quarter and exceeded 12 percent earlier this week, suggesting the market is vulnerable to a short-covering rally, if economic data betters expectations.

Beijing is expected to post its official manufacturing purchasing managers' index (PMI) on Sunday. Last week, the HSBC flash purchasing managers index, the earliest indicator of China's industrial activity, fell back to 48.1 from February's four-month high of 49.6.

NON-PERFORMING LOANS KEY FOCUS FOR CHINA BANKS

Bank of Communications (BoComm), China's fifth-largest lender, bucked broader market and sector weakness, rising 0.7 percent after posting a forecast-beating 30 percent rise in quarterly earnings late on Wednesday.

More important, its non-performing loan ratio fell to 0.86 percent at the end of 2011 from 1.12 percent from a year earlier, even as the bad loan ratio for local government debts, which totaled 216 billion yuan, rose slightly from the last quarter.

Its effort to raise funds announced in mid-March was also cheered by investors as the private placement targeted its existing large shareholders and minimised stake dilution.

But it has so far proved to be the exception.

Annual earnings from larger peers China Construction Bank (CCB) and AgBank for 2011 have failed to excite, with CCB posting a 10 percent rise in non-performing loans in the last quarter.

AgBank is currently trading at a 12-month forward earnings multiple that is a 33 percent discount to its historical median, while CCB is trading at a 47 percent discount, according to StarMine.

With first quarter earnings expected to follow in April after the reporting season for 2011 earnings ends this week, weakness in the Chinese banking sector could continue and pressure the broader market, given its high weightage.