China bank shares drag Hong Kong's HSI into red after rate cut
* HSI down 0.3 percent, banks the biggest drag
* PBOC cutting rates, lowering lending floor to hit bank margins
* Investors ignoring low valuations as bank profits pressured (Updates to mid-morning)
By Vikram Subhedar
HONG KONG, July 6 (Reuters) - Hong Kong shares traded weaker at mid-morning Friday, dragged down by financials after China's second interest rate cut in weeks raised concerns that bank net interest rate margins are eroding and that economic growth has been weaker than expected.
China's 'Big Four' banks all fell with Agricultural Bank of China the weakest of the lot, down 2.2 percent. China Construction Bank lost 2.1 percent while ICBC , the world's largest bank by market value, was down just under 1.0 percent.
Those losses weighed on the Hong Kong's benchmark Hang Seng index pulling it down 0.3 percent as of 0325 GMT. The index hit a seven-month closing high on Tuesday.
On the mainland, the Shanghai Composite was down 0.5 percent while the large-cap focused CSI300 was flat.
China cut its benchmark one-year lending rate by 31 basis points to 6 percent and gave banks more leeway to set lending rates. Analysts said the move was aimed at stimulating borrowing by creating a more competitive landscape.
However, market players remain doubtful that the rate cut will boost the economy.
Weakening demand from the West is hitting exports, while the key property sector remains pinched by the government's tightening and domestic consumption is not showing signs of picking up the slack.
"Businesses only borrow money when they are confident that they can put that money back to work in the real economy and earn a return and not only because borrowing costs are lower," said Andrew Sullivan, principal sales trader at Piper Jaffray in Hong Kong.
"Right now growth is clearly slowing. The way the market is trading, we could very well see another leg down," said Sullivan.
China will have difficulty meeting its 10 percent trade growth target this year, Vice Premier Wang Qishan said in comments published late on Thursday. His remark underlines challenges to supporting critical pillars for the world's second-biggest economy.
Next week China will announce its second quarter growth rate, which analysts expect to have dropped for a sixth successive period.
The People's Bank of China has also lowered the lending rate floor while maintaining the deposit rate ceiling - a move that will put pressure banks' net interest margins.
The rate cuts and lower lending rate floor are "meant to pressure banks to lower their lending rates and generate more loan volume," May Yan, head of China banks research at Barclays, said in a note.
Yan expects banks' average net profit in 2012 could decline between 5 and 8 percent while in 2013 the hit could be as much as between 24 to 34 percent.
The worry that China's steps to boost growth might come at the expense of bank profits has kept investors away from the sector despite valuations near record lows.
ICBC shares in Hong Kong trade at 5.2 times forward 12-month earnings, half their median valuation since listing and below levels seen in the aftermath of the Lehman Brothers bankruptcy in 2008, according to Thomson Reuters StarMine. (Reporting by Vikram Subhedar; Editing by Richard Borsuk)
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