China shares slide on tightening worries, hit HK

* China, HK shares knocked off multi-month peaks

* China shares post biggest drop in 8 months

* Debutantes CSCEC and BBMG outperform

(Updates to close)

By Parvathy Ullatil & Samuel Shen

HONG KONG, July 29 (Reuters) - Chinese stocks fell 5.0 percent on Wednesday in heavy turnover, posting their biggest daily decline in eight months and dragging down Hong Kong-listed counters amid worries that banks may begin to restrict lending.

The late afternoon sell-off in the Chinese market had a ripple effect across the region, triggering a bout of profit taking in Australian stocks .AXJO and currency AUD=D4 as well and sending the S&P 500 futures SPc1 down more than 1 percent earlier.

"There is concern that China will take steps to tighten money supply, but whatever the reason may be, this a just a healthy, normal correction that is necessary if the market is to continue moving up," said Patrick Shum, president with BMI Fund Management.

China's two biggest state-owned commercial banks, Industrial and Commercial Bank of China (ICBC) (1398.HK) and China Construction Bank (CCB) (0939.HK), have put a lid on their 2009 lending targets, according to domestic media reports, a move that will significantly slow overall Chinese credit growth in the second half. [ID:nPEK278491]

Shares in ICBC were down 2.1 percent in Hong Kong while Bank of China (601988.SS) led losses on the Shanghai bourse.

THE IPO TRIGGER

Additionally, analysts said high-profile listing debuts in both markets may have also triggered an outflow of speculative money that was previously tied up in the IPOs.

China State Construction Engineering Corp (CSCEC) (601668.SS), which last week raised $7.3 billion in the world's largest initial public offering in a year, surged 56.2 percent by the close of its maiden trading session.

Building materials group BBMG Corp (2009.HK) logged a similar percentage gain in Hong Kong's strongest stock debut this year after its $768 million share sale was more than 700 times oversubscribed.

But Sichuan Expressway (601107.SS), which surged in its market debut in Shanghai on Monday in a frenzy of speculative buying, fell by its 10 percent daily limit for a second day in a row as investors scrambled to lock in profits.

The benchmark Hang Seng Index .HSI was down 2.4 percent at 20,135.50 while turnover swelled to its highest in nearly two months at HK$101.8 billion.

The China Enterprises Index .HSCE, which represents top locally listed mainland Chinese stocks, was 3.7 percent lower at 11,962.66.

Adding to the pressure, weak U.S. consumer confidence in the previous session weighed on Shanghai copper SCFc3 and on oil, which slid below $67 a barrel CLc1, beating down resource stocks.

Top refiner Sinopec Corp (0386.HK) dropped 5 percent to HK$6.78 after China trimmed retail fuel prices by a modest 3 percent, following two big increases last month that raised rates to their highest ever.

Stocks also came under selling pressure ahead of major earnings announcements starting next week.

The relative strength index for the HSI, which is used by some anlysts to determine an overbought or oversold position in the market, rose to its highest since October 2007 on Tuesday.

Jiangxi Copper (0358.HK) retreated 8.5 percent to HK$16.32 after flagging a likely 57-64 percent fall in first-half profit from a year earlier on a substantial drop in product prices. China COSCO Holdings (1919.HK) slid 6.7 percent after China's biggest shipping conglomerate signaled a first-half loss as the recession battered the global shipping industry.

HEALTHY CORRECTION

The Shanghai Composite Index .SSEC closed at 3,266.432 points after falling as much as 7.7 percent in hectic afternoon trading, snapping a five-day rally.

The index has piled on 79 percent so far this year, to rank the best performing major market in the world.

Turnover of Shanghai A shares was very heavy at 295.8 billion yuan ($43.31 billion), the highest on record.

"The market has been roaring higher since March without a pause, so a correction is natural as investors took profit amid mounting concern over possible government intervention," said Li Mingliang, strategist at Ping An Securities Co.

"However, there's no sign yet of any change to the government's loose monetary policies, so it's too early to judge whether the bull-run has ended."

China's banking regulator on Tuesday had urged lenders to ensure that loans enter the real economy, rather than flow into property and stock markets for speculation.

Property stocks retreated on concerns that slower loan growth would make borrowing more difficult for developers and home buyers.

China Vanke (000002.SZ), China's second-biggest listed developer, slumped 7.30 percent to 13.2 yuan, while Gemdale (600383.SS), a Shenzhen-based real estate company, tumbled its 10 percent daily limit to 18.09 yuan.

Steel shares tumbled, with Baoshan Iron & Steel (600019.SS), China's biggest listed steelmaker, down 3.83 percent at 9.04 yuan. The European Union passed a proposal to impose a 24 percent anti-dumping tax on Chinese steel wire rod imports for five years.

Other metal-related stocks also dropped, with Aluminum Corp of China (601600.SS) down 8.36 percent at 17.31 yuan.

(Editing by Edmund Klamann and Ken Wills)