China, HK stocks fall on rate rise worries

* Hong Kong market on track to lowest close in two weeks

* Banking, property, resource issues decline

* Institutional investors active in China

(Updates to midday)

By Jun Ebias and Lu Jianxin

HONG KONG/SHANGHAI, March 22 (Reuters) - Shares in Hong Kong and China fell at midday on Monday, joining a slump in other Asian markets, on worries other central banks may follow India's surprise rate rise last week.

Hong Kong's benchmark Hang Seng Index .HSI was down 1.7 percent, or 361.72 points at 21,009, on track to its lowest close since March 5. Turnover inched up to HK$31.4 billion ($4 billion) from midday Friday's HK$28.6 billion.

"Asian markets are overreacting to the surprise rate hike in India," said Andy Lam, strategist at Harris Fraser. "The market is concerned about credit tightening and exit strategies in Asia, particularly in China."

"But I don't see China immediately raising interest rates. The inflation problem in India is far more serious than in China," Lam added.

The China Enterprises Index .HSCE of top locally listed mainland Chinese stocks was down 1.7 percent.

Resources-related counters fell as commodity prices dropped on a strong U.S. dollar. PetroChina (0857.HK) shed 2.7 percent and CNOOC (0883.HK) slid 2.5 percent. [ID:nSGE62L00B]

Aluminum maker Chalco (2600.HK) dropped 3.2 percent and coal producer China Coal (1898.HK) declined 1.9 percent.

Rate-sensitive banks and property plays slipped. Industrial and Commercial Bank of China (1398.HK) fell 2.2 percent and Hang Lung Properties (0101.HK) dropped 3.8 percent.

Higher rates may discourage borrowers from taking out loans to invest in properties.

Brilliance China Automotive (1114.HK) slumped 5.6 percent. The company said on Friday that it expected to record a substantial loss for 2009 on a one-time loss on the sale of its Zhonghua sedan business. [ID:nHKV002290]

Outperforming the market, Air China (0753.HK) rose 1.4 percent, on news China's flagcarrier plans to raise its stake in Shenzhen Airlines. [ID:nTOE62K00Z]

COSCO International Holdings (0517.HK) jumped 7.1 percent to its highest since June 2008. The company said it had not yet decided to cut its stake in Sino-Ocean Land, in response to a media report that COSCO Group requested COSCO (Hong Kong) Group to dispose its 8 percent interest in Sino-Ocean Land.

Sino-Ocean Land (3377.HK) was down 3.4 percent.

CITIC Pacific (0267.HK) fell 2 percent on its plan to sell its 65 percent interest in a steel mill in Shijiazhuang for 1.58 billion yuan.

Today's top two losers were DBA Telecom (3335.HK), which slumped 14 percent, and United Gene High-tech (0399.HK), which tumbled 12.5 percent. DBA fell after reporting a drop in net profit for 2009, while United Gene slid after it said it planned to issue new shares.

SHANGHAI SLIPS

The Shanghai Composite Index .SSEC ended the morning down 0.17 percent at 3,062.600 points, with banking stocks relatively active as an unexpected rate hike in India stirred worries over monetary policy tightening in China, although the impact was limited.

The Indian central bank raised rates late on Friday, the first increase since it began cutting in 2008, citing intensifying inflationary pressures and a steady economic recovery for the move. [ID:nSGE62L01X]

"India's rate hike sparked some fears over a similar move in China, but its impact remained small as many investors believe China would tighten its monetary policy only at its own pace," said Qian Qimin, deputy head of research at Shenyin & Wanguo Securities in Shanghai.

"Despite last week's rebound, the (Chinese) market has not yet found a new direction and is likely to continue range-bound trading in the near term on the absence of major domestic news."

Institutional investors appeared to be trying to breathe some life into the market by actively trading large-cap banking stocks, pushing Minsheng Bank (600016.SS) up 1.21 percent to 7.54 yuan and Pudong Development Bank (600000.SS) up 1.7 percent to 22.17 yuan. The two were among the morning's 10 most actively traded stocks.

Trading in banks helped to lift turnover to 61 billion yuan ($9 billion) from Friday morning's thin 50 billion yuan. Falling Shanghai stocks outnumbered gainers by 519 to 350.

China's stock regulator said late on Friday that it had approved the first batch of six brokerages to conduct business in a pilot scheme for margin trading and short selling of stocks that is due for launch soon. [ID:nBJD003602] [ID:nTOE62K010]

State media reported the reform could pump 30 billion to 90 billion yuan of fresh funds into the market, but the reports did not help brokerage stocks on Monday morning because of the high risks involved in the new business, traders said.

Haitong Securities (600837.SS), one of the six selected, dropped 0.93 percent to 17.11 yuan and Citic Securities (600030.SS) was down 0.46 percent at 28.10 yuan.

Jiangsu Changle Electronics (600584.SS) was the most actively traded share for a fourth straight trading day, rising 3.9 percent to 11.19 yuan in a four-day rally despite a lack of publicly announced news about the firm, with state media reporting that speculative "hot money" was fighting a battle over the shares.