Hong Kong shares surrendered early gains on Monday, dragged down by Chinese banks after mainland media reported that loan growth could fall short of quarterly targets.

Also hurting the finance sector was anxiety about an earnings season that starts this week, as investors worry that some Chinese banks, particularly smaller ones, will need to raise funds, which could dilute stakes of existing shareholders.

Weakness in banking shares crimped gains in mainland Chinese markets, as the Shanghai Composite Index ended up 0.2 percent. Turnover in Shanghai was at its lowest in more than a week, while volume in Hong Kong hit a two-month low.

The China Enterprises Index of the top mainland listings in the territory shed 1.6 percent, while the broader Hang Seng Index fell 1 percent.

The official China Securities Journal reported on Monday that new yuan loans by Chinese banks are expected to reach about 800 billion yuan ($126.53 billion) in March, suggesting total new loans issued in the first quarter may fall short of the 2.4 trillion yuan target.

Weak loan growth is a key factor today, but investors are also looking to the earnings of Chongqing Rural Commercial Bank, which could shed some light on the extent of the fund raising needs of smaller banks in China, said Jackson Wong, Tanrich Securities' vice-president of equity sales.

Fears of fund raising among Chinese banks, combined with Premier Wen Jiabao's hawkish comments on the property sector last Wednesday, have kept people cautious.

Chongqing Rural Commercial Bank shed 2.4 percent ahead of its 2011 earnings after markets close on Monday. A gauge of Chinese financials listed in Hong Kong slumped 2.1 percent.

According to Thomson Reuters StarMine, Chinese banking components on the China Enterprises Index are up about 6 percent this year, compared with an 11 percent rise for the benchmark.

The mainland's biggest two lenders, Industrial and Commercial of China (ICBC) and China Construction Bank (CCB), were among the top drags on the Hang Seng and China Enterprises indices, down 1.5 and 1.8 percent respectively.

ICBC is down 8.4 percent this month, while CCB has lost 5.5 percent. This compares with the 2.6 percent decline on the Hang Seng Index and the 6.7 percent slide on the China Enterprises Index during March.

Smaller rival China Merchants Bank slid 3.6 percent in Hong Kong and 0.7 percent in Shanghai. Other smaller banks also depressed the Shanghai Composite, with China Minsheng Bank down 0.6 percent.

Chinese developers were also broadly weaker in the mainland after data over the weekend suggested Chinese home prices fell from January for a fifth consecutive month and are expected to continue heading south in coming months.

The Shanghai property sub-index lost 0.4 percent on Monday, bringing its loss to 5.3 percent since Wen's hawkish comments on the sector last Wednesday. Poly Real Estate slipped 0.8 percent on Monday.

RARE EARTH STRENGTH HELPS SHANGHAI EKE GAINS

Strength in resources-related stocks helped the Shanghai Composite eke out a gain. The Shanghai material sub-index jumped 2 percent, led by rare earths producers seen benefiting from high demand for a commodity in short supply.

Inner Mongolia Baotou Steel Rare-Earth (Group) Co Ltd gained 4.3 percent in almost twice its 30-day average volume, closing at its highest since last July.

It has jumped 30 percent this month, with gains accelerating after the U.S., Europe and Japan joined forces last week to challenge China's restrictions on exports of rare-earth metals.

Gold-related stocks were also stronger on higher gold prices. Shandong Gold gained 2.6 percent and Zijin Mining Group rose 0.9 percent.

Aluminum Corporation of China Ltd (Chalco) slumped 4.2 percent in Hong Kong. On Friday, after markets closed, it reported a bigger than expected fourth-quarter net loss of 729.6 million yuan ($115.3 million) and warned of losses in 2012's first quarter.