Hong Kong and Shanghai shares slipped on Friday in light volume as investors locked in gains in financials ahead of bank earnings reports due next week. The Hang Seng index fell 0.6 percent to 23,517.5 on the day, producing most of the week's 1 percent decline that marked its first weekly drop since the end of August. Trade was HK$84 billion, an eighth lower than last week.
-- Hang Seng down; first weekly drop in 8 weeks
-- Shanghai Composite down; still up on week
Mainland banks had been a popular buy since mid-September as investors picked up market laggards, encouraged by robust lending and low valuations. "The surprise rate hike sort of threw a wrench in the works," said Christian Keilland, managing director at BTIG in Hong Kong, referring to China central bank's surprise decision to raise interest rates on Wednesday for the first time since late 2007.
China Construction Bank shares fell 1.6 percent and were the biggest drag on the index, having provided the biggest boost on Thursday as investors rotated in and out of sectors.
CCB shares have gained 10 percent in October, outperforming the broader market by nearly two times. Bank of China fell 2 percent, Agricultural Bank of China fell 1.2 percent and ICBC was down 0.6 percent.
Known as the "Big Four" in China, they are scheduled to report third-quarter earnings next week. Bank of China is expected to post a sequential decline in profits while the others are seen producing flat to higher earnings. China Mobile fell 0.7 percent, the third straight daily decline surrounding disappointing earnings from the world's biggest mobile phone operator.
Transport stocks, including automobiles and railway equipment makers, bucked the trend, helped by expectations that domestic demand in China is rising as the government tries to rebalance the economy. China Railway Construction rose 4.9 percent to a 52-week high, breaking out of a 2-1/2 month trading range. Geely Auto rose 6 percent.
The Shanghai Composite Index closed down 0.3 percent at 2,975.0, extending losses of 0.7 percent from Thursday, weighed down by banks and property stocks. While firm support is seen at the index's 250-day moving average at 2,888, some traders said the market needs to break through 3,000 to make a more decisive move on the upside.
"The resistance point is key here. If we cannot convincingly break above 3,000 points by early next week, the index is set to trend lower," said Chen Huiqing, analyst at Huatai Securities in Shanghai. China's rate rise has left nagging concerns that monetary policy will be tightened again, especially after the central bank highlighted in a separate report risks from inflation and asset bubbles.
Analysts said these worries will weigh on banking and property shares, especially as the charts indicated that the market was already overbought. The 14-day relative strength index (RSI) was at 75 on Friday, five points into overbought territory. Heavyweight Agricultural Bank of China and Minsheng Bank both dropped 1.1 percent. Coal and new energy issues extended gains on recent government support plans. Shangxi Coal rose to its 10 percent limit while Datong Coal jumped 3.8 percent.