(REUTERS) - China shares closed at their lowest level in almost 34 months on Thursday on fears that the Chinese economy will cool further, with strong turnover a bearish sign pointing to more losses to come.

Hong Kong stocks managed to hold on to gains despite the downdraft from mainland markets, with the Hang Seng Index ending up 0.5 percent at 18,813.4 points, and the China Enterprises Index of top mainland listings in Hong Kong gaining 0.5 percent.

But traders said weak turnover in Hong Kong pointed to a lack of confidence and signaled that the day's gains may not be sustained.

In Shanghai, investors unwound positions in growth-sensitive sectors and small cap names after the HSBC China services purchasing managers index (PMI) for December showed only sluggish growth in the sector.

The Shanghai Composite Index reversed early gains to slip for a second-straight session, closing down 1 percent at 2,148.5 points. The Shanghai materials sub-index was a relative underperformer, declining 2.4 percent.

Insurance firms and brokerages, seen as proxys of the A-share markets due to their extensive exposure, were among the top drags. China Life Insurance shed 5 percent, while Citic Securities lost 2.8 percent.

Today's move clearly shows we haven't seen the bottom in the mainland. Economic data this quarter could get quite ugly, so further weakness, particularly in the smaller caps, is likely, said a Shanghai-based manager of a Qualified Foreign Institutional Investor (QFII) fund, declining to be identified as he was not authorised to speak to the media.

The CSI500, a gauge of small- and medium-cap names listed on the Shanghai and Shenzhen bourses, slumped 3.7 percent. Zhejiang China Light & Textile Industry City Group tumbled the maximum 10 percent.

Chinese banks were a rare bunch that bucked broader weakness after Shanghai Pudong Development Bank Co Ltd on Wednesday reported a 42 percent increase in net profit in 2011.

The earnings report pushed Pudong's shares up nearly 3 percent on Thursday and prompted some investors to buy into the broader sector, taking the numbers as a sign that concerns over mounting bad debts may have been overblown.

It's possible some funds have bought into banks today. Valuations are already very low to begin with, so any signs that show fears are overblown will bring investors back into the market, said Chen Yi, a Shanghai-based analyst with Xiangcai Securities.

OIL STRENGTH SUPPORT HK GAINS

In Hong Kong, continued strength in oil stocks helped support broader gains, but weak turnover and strength in defensives pointed to caution on renewed euro zone fears in global markets, with a French bond auction later in the day the latest flash point.

It's fair to say most are expecting the macro picture to worsen further before getting better. Flows won't start increasing unless we get more clarity, particularly from China said Benjamin Chang, chief executive of LBN Advisors, which manages $450 million worth of assets in two China funds.

Higher oil prices, spurred by fears of disruptions from Iran, boosted the three Chinese oil majors. CNOOC Ltd rose 2.8 percent, while PetroChina Co Ltd and China Petroleum & Chemical Corp (Sinopec) gained 1.6 and 2.3 percent, respectively.

Of the three, short-selling interest has been highest for Sinopec, averaging more than 17 percent of total turnover in the five sessions prior to Thursday.

CSR Corp, China's largest train maker, gained 1.9 percent after it said 2011 net profit could rise more than 50 percent from the prior year on strong orders.

It slumped 56.6 percent last year, with the bulk of losses coming after China's worst high-speed train accident in July, halting ambitious expansion and compunding problems relating to it high debt levels.