Chinese shares had eased by midday Friday as talk of interest rate increases and further policy tightening by Beijing kept investors on the back foot despite some analysts saying the chances of a rate rise over the weekend were slim.
The weak mainland market weighed on Hong Kong's bourse although the strong momentum in financials seen in recent sessions helped the benchmark Hang Seng Index tip over into positive territory.
The Shanghai Composite Index was down 0.9% by the midday trading break, led by weakness in large-cap shares such as banks.
Speculation of policy action has often emerged on Fridays as the central bank tends to announce its decisions at the weekend.
"This worry has led the index down and banking shares are affected," said Cao Xuefeng, head of research at Huaxi Securities in Chengdu. "But we think the possibility of policy tightening is relatively small ahead of key data (due on January 20)"
Some market players expect Beijing to use differentiated reserve requirements as one way to keep a lid on inflation after Chinese banks doled out 500 bln yuan ($75.71 billion) in new loans in the first week of January alone
Hinting at such a possibility, in the money market the benchmark seven-day government bond repurchase rate rose 22 bps to 2.5439%.
Many of the 16 banks listed in Shanghai and Shenzhen fell, with China Everbright Bank Co, the second most active stock on the Shanghai market, down 1.2%, and Agricultural Bank of China off 0.75%.
Bucking the trend, pharmaceutical companies outperformed amid concern about rising flu cases in the country.
Guilin Layn Natural Ingredients Corp, the second-biggest gainer in Shenzhen, jumped 9%, while Shanghai Furen Industrial (Group) Co rose 6.1%.
FINANCIALS LIFT HSI
Financial issues in Hong Kong have been the subject of renewed interest this week, leading the benchmark to four successive days of gains as investors bet that reasonable valuations and strong earnings would help the laggard sector catch up.
The financials sub-index which fell 1.1% last year compared with a 5.3% advance by the benchmark, is up 5.7% so far this year, the second-best performing sector behind property developers.
A trader at a large U.S. investment bank in Hong Kong said the retail focus was moving to banks, pointing to increased warrants activity in the sector.
Of overall turnover on the Hong Kong stock exchange, 34% was warrant-related, data from the exchange showed.
Retail investors in Hong Kong are active players in the liquid local warrants market, partly because of constraints on individuals to play on single-stock options, and higher volumes of traded warrants often point to increased retail activity.
HSBC Holdings Plc rose 0.4% on 1.3 times its average 30-day traded volume. BOC Hong Kong (Holdings) Ltd rose 2.9%, while Industrial & Commercial Bank of China Ltd rose 1%.
Property counters rose. led by Cheung Kong (Holdings) Ltd, up 1.8% to HK$133.20, after brokerage Morgan Stanley raised its price target to HK$150 and reiterated its "overweight" rating on the industry bellwether.
Tsingtao Brewery Co Ltd fell sharply, extending losses from the previous session on heavy volume over fears that escalating food prices would cut into the company's profit margins. Tsingtao fell 4.5%, sliding below the November 2010 low, and have lost more than a fifth of their value since hitting a record high of HK$46.60 in September 2010.
The company faces rising barley and sugar costs as prices of agricultural commodities rise across the globe.
