China shares suffered their biggest daily loss in more than three weeks on Tuesday after hopes for a cut soon in bank reserve requirements were doused, with the Shanghai benchmark breaking below key chart support, pointing to further weakness ahead.
The mainland's slide spread to Hong Kong markets, reversing early gains. The China Enterprises Index of the top mainland listings in the territory lost 0.6 percent. The broader Hang Seng Index declined 0.1 percent.
The Shanghai Composite Index finished down 1.7 percent at 2,291.9 points, breaking below chart support at 2,300, a level that had capped gains for most of the past month.
Turnover in Hong Kong was at its lowest since Jan 30, while A-share turnover in Shanghai declined for the second-straight session.
The decline today is largely due to dashed hopes of an imminent cut in reserve requirements, which was a large part of this start-of-the-year rally and spooked retail investors, said Guo Yanling, an analyst with the Shanghai Securities brokerage firm.
The Chinese central bank had enquired about demand for its bills on Monday but did not follow up with a fresh issue, appearing to extend its pre-new year suspension ahead of January data for inflation and trade, expected on Thursday and Friday.
Mainland investors took that to suggest few problems in the money markets -- a position accentuated by a negligible repo market move on Tuesday -- and a reduction in the prospects of a cut in reserve requirements in the near term.
A trader at an American brokerage in Hong Kong said Chinese names were further plagued by market chatter that January new loans were smaller than expected. Beijing is expected to report January loan growth and money supply data next week.
The International Monetary Fund (IMF) said late on Monday that China's annual economic growth could be cut nearly in half this year if Europe's debt crisis tips the world economy into a recession, putting pressure on Beijing to unveil significant fiscal stimulus.
The IMF warning weighed on property developers, which extended losses after China Vanke Co Ltd, the country's largest developer by sales, said on Friday that January sales stood at 12.2 billion yuan ($1.94 billion), a fall of 39 percent from a year earlier.
Shenzhen-listed Vanke lost 3.2 percent, while Shanghai-listed smaller rivalPoly Real Estate declined 3.1 percent. The Shanghai property sub-index was a standout underperformer among sectors, down 2.2 percent.
Shares of steel companies fell after China's industry ministry warned that low demand and higher costs are expected to further erode the sector's profits in 2012.
Baoshan Steel lost 1.8 percent. Smaller Laiwu Steel lost 1.5 percent in almost four times its 30-day average volume.
CHINA WEAKNESS DRAGS HONG KONG LOWER
In Hong Kong, Chinese insurers, whose shares are seen proxy plays on mainland markets because of their extensive investments, were weak. China Life Insurance was the top drag on the Hang Seng Index, losing 2.2 percent.
Chinese Internet giant Tencent Holdings slipped 1.2 percent in almost twice its 30-day average volume after peer Sohu.com Inc forecast a weak first quarter as it braces for steeper competition.
Strength in defensive names pointed to caution, with the Hang Seng utilities sub-index a relative outperformer on, up 0.7 percent. China Unicom was among the Hang Seng Index's top boost, up 3.2 percent.
Gains in HSBC Holdings Plc, Europe's largest bank and the largest Hang Seng Index component stock, helped limit losses on the benchmark.
It rose 0.7 percent to close at its highest since Oct. 31. Gains accelerated after European stock futures opened higher in mid-afternoon.
The Hang Seng Index had opened higher on Tuesday, but retreated from intraday gains with losses limited at around 20,564, a level that has supported the benchmark for the last three sessions.
It is seen capped on the upside by its 250-day moving average, currently at 21,043.2 as investors watch the outcome of Greek debt-restructuring talks. If there's a positive ending, the HSI could break above 21,017, the bottom of a 708-point gap that opened between Aug. 4 and 5.