China, HK shares extend losses in skittish session

* HK, China shares drop in volatile trade

* China shares down 18 pct from 14-month peak

* China Everbright jumps 42 pct on debut, beat expectations

(Updates to midday)

By Parvathy Ullatil and Claire Zhang

HONG KONG, Aug 18 (Reuters) - China and Hong Kong shares fell further in skittish trade on Tuesday, building on steep declines in the previous session, as investors worried that big institutions have been pulling out of the market.

Dodging the downdraft, China Everbright Securities (601788.SS), which raised 11 billion yuan ($1.61 billion) in its Shanghai IPO, opened up 42 percent in their Shanghai debut, at the high end of expectations but less robust than last month's sizzling debuts, after a market rally stalled. [ID:nSHA1847]

The stock ended the morning session 32.1 percent higher at 27.91 yuan.

The mood among mainland Chinese investors was cautious, with the main index down as much as 18 percent in Tuesday's intraday trading from its 14-month high of 3,478 points hit two weeks ago.

"Investors are jittery that the big summer rally has finally come to an end. China's social security fund started selling stocks in July and that is enough to get others selling," said Francis Lun, general manager with Fulbright Securities.

Chinese insurers are close to their permissible investment limits in equities while the National Social Security Fund reduced its net exposure to Shenzhen-listed A shares by 664 million yuan in July, JP Morgan said in a note on Tuesday.

Analysts in Shanghai said the two-week slump had pushed valuations of China's stock market to much more reasonable levels, and the potential of sliding would be more limited in the near term.

AIR CHINA, CITIC PACIFIC SLUMP IN HK

Air China (0753.HK) shares tumbled nearly 10 percent as investors feared China's biggest airline may have paid too much and taken on debt in raising its stake in Hong Kong carrier Cathay Pacific (0293.HK). The stock ended the morning session percent 5.3 lower at HK$4.33.

"It's disappointing that Air China failed to capture good bargain opportunities during the drastic global downturn," said Citigroup analyst Ally Ma in a note to investors.

Shares in CITIC Pacific (0267.HK), which sold a 12.5 percent stake in Cathay to Air China for $808 million [ID:nT321641], also slumped more than 9 percent, while Cathay Pacific shares rose 0.3 percent.

Goldman Sachs raised its estimate for CITIC Pacific's 2009 per share earnings by 35 percent to factor in the disposal gain, but it cut its 2010 estimates by 5 percent and 2011 estimates by 11 percent to account for the lack of profit contribution from Cathay.

By 0410 GMT the benchmark Hang Seng Index .HSI was 0.4 percent lower at 20,054.04.

Consumer goods exporter Li & Fung (0494.HK), among the few gainers on the blue-chip index, rose 3.7 percent to HK$27.75 after BNP Paribas upgraded the stock to a buy rating from reduce amid an improving retail environment in the United States.

BNP raised its target price on the stock to HK$30.

The China Enterprises Index .HSCE, which represents top locally listed mainland Chinese stocks, was down 1 percent at 11,280.40.

SHANGHAI LOSSES SEEN LIMITED

The Shanghai Composite Index .SSEC dropped 1.1 percent to 2,840.046 by midday, adding to the 5.8 percent dive a day earlier.

Losing Shanghai A shares outnumbered gainers by 569 to 324, while turnover for Shanghai A shares dropped to 64.9 billion yuan ($9.5 billion) from Monday morning's 75.3 billion yuan.

"Earlier this year, the index rose too much without a decent correction, and that caused a torrential fall recently," said senior analyst Zhang Qi at Haitong Securities.

"The pace of such a fall cannot be sustained, though we also do not expect the index to rebound sharply immediately, partly because of weakening overseas markets at the moment."

The index is seen moving in a relatively narrow range of 2,800 to 3,100 points in the coming one or two weeks, analysts said.

Brokerage shares sank as investors worried the market's weakness would hit their bottom lines. Everbright's rivals, CITIC Securities (600030.SS) and Haitong Securities (600837.SS), sank more than 6 percent.

Southwest Securities (600369.SS) dropped its 10 percent daily limit to 18.02 yuan after unveiling an A-share placement plan to raise up to 6 billion yuan to supplement capital base.

The index's recent fall is mainly due to profit-taking after a 90-percent market rally earlier this year got ahead of China's economic recovery. The index was also under pressure from worries about a flood of new shares and weakening overseas markets.

China's stock regulator said it would review on Friday an application by China CNR Corp, one of the country's top two train makers, for a initial public offering to raise around $1 billion to fund technical upgrades. [ID:nSHA218957]

(Editing by Ken Wills)