China policy worries slam HK shares; China shares gain

* HK shares dragged down by China Mobile, banks

* China main index jumpes over five-day moving average (Updates to midday)

By Parvathy Ullatil & Claire Zhang

HONG KONG, Aug 21 (Reuters) - Hong Kong shares dropped 1.6 percent on Friday as fears resurfaced about a likely clampdown on China's easy monetary polocy, while shares in China Mobile (0941.HK) continued to slide after a disappointing second-quarter performance.

China shares rose 0.7 percent ahead of the midday break at 0330 GMT, led by banks after strong earnings reports, with the main index surmounting a near-term technical hurdle.

Reports that China's banking regulator may tighten capital rules by excluding subordinated bonds banks sell to other lenders from their capital base, triggered selling in Chinese bank stocks in Hong Kong.

The China Banking Regulatory Commission (CBRC) has issued a document to lenders seeking feedback on the move, banking sources close to the regulator told Reuters early in August. [ID:nSP529534]

"This is old news and the market already responded to this once. But investor confidence has been so shaken by the sell-off earlier this week that every time this news surfaces its an excuse to sell," said Steven Leung, sales director with UOB Kay Hian.

HONG KONG

The benchmark Hang Seng Index .HSI was 1.6 percent lower at 20,007.35 with shares worth HK$35.3 billion changing hands.

China Mobile (0941.HK), the world's largest mobile carrier, fell as much as 3.9 percent to a three-week low on Friday morning after the company posted its slowest interim profit growth since its listing. The stock trimmed losses to 3.7 percent by midday.

China Mobile posted a 1.6 percent drop in quarterly profit on Thursday, hurt by a slow economy, weak 3G rollout and rising competition. The company faces a further squeeze on profit margins as competitive pressures intensify and an expensive buildout of a new, untested 3G network weighs. [ID:nPEK58027].

China Construction Bank (0939.HK) shed 1.7 percent, while Bank of China (3988.HK) gave up 2.4 percent.

China's new bank loans are seen rebounding to about 500 billion yuan ($73 billion) in August after shrinking to 356 billion yuan in July, although banks will continue to curb lending in the second half, the official China Securities Journal said. [ID:nSHA241087]

The China Enterprises Index .HSCE, which represents top locally listed mainland Chinese stocks, was down 1.7 percent at 11,328.90.

Dodging the downdraft, cement maker Anhui Conch (0914.HK) jumped 4.4 percent on expectations that demand for the construction material is set to improve significantly in second half of 2009, while cement prices are also expected to pick up.

The company reported a 2.3 percent decline in its first-half earnings on Wednesday.

SHANGHAI

The Shanghai Composite Index .SSEC rose 0.7 percent to 2,932.740 on Friday.

The index extended Thursday's 4.5 percent gain after a tentative start to trade, as a recent 20 percent slide in just two weeks brought valuations down to more attractive levels while China's economic fundamentals remained solid.

"Investor sentiment has not yet fully recovered despite yesterday's rebound," said analyst Zhou Lin at Huatai Securities in Nanjing. "So they will watch the market's performance as well as economic fundamentals to decide on their investments."

He expected the market to soon test the 3,000 point level, which could offer firm resistance.

Industrial & Commercial Bank of China (601398.SS) rose 2.3 percent to 4.86 yuan after posting a second-quarter net profit that beat forecasts. [ID:nPEK347672]

Shenzhen Development Bank (000001.SZ) gained 2.3 percent after saying net profit in the first half rose 7.8 percent to 2.3 billion yuan.

Recently listed shares were a drag on the market, however, with Everbright Securities (601788.SS), which debuted on the Shanghai market on Tuesday, slumping 3.9 percent, while Sichuan Expressway (601107.SS), which listed in late July, fell 1.2 percent to 7.15 yuan.

Technically, the index managed to break above the closely watched five-day moving average just above 2,900 points, which analysts said could indicate the start of a solid technical rebound.

The fundamentals appeared more supportive, after the index's recent tumble lowered Chinese share valuations to a more reasonable average forecast price earnings ratio of about 26 times, against this year's high of 32 times in early August. (Editing by Edmund Klamann and Chris Lewis)