* HSI -0.4 pct, H-shares -1 pct, CSI300 -0.5 pct
* HK reverses early gains, more weakness ahead if losses persist
* China banks, property sink as fund injection disappoints
* PetroChina jumps on natural gas price reform
By Clement Tan
HONG KONG, July 2 (Reuters) - Hong Kong and China shares fell from their highest in more than a week on Tuesday, with Chinese banks as key index drags after disappointment with the amount of funds the central bank injected at the first of this week’s two scheduled open market operations.
Some market players expected a larger injection than the 36 billion yuan ($5.9 billion) that the People’s Bank of China allowed to flow into the banking system. After Beijing last week pledged to ensure adequate funds, short-term borrowing rates were knocked off record highs and stock markets rebounded.
At midday, the CSI300 of the leading Shanghai and Shenzhen A-share listings was down 0.5 percent, while the Shanghai Composite Index slipped 0.4 percent. Both had closed on Monday at their highest since June 21.
The Hang Seng Index fell 0.4 percent at 20,721.5, after starting the day up 1 percent as Hong Kong returned from a three-day holiday weekend. The China Enterprises Index of the top Chinese listings in Hong Kong shed 1 percent.
Both had closed last Friday at their highest since June 19 before shutting for the weekend and a holiday on Monday. Turnover in both Hong Kong and China markets stayed relatively modest at midday.
“If markets close at current levels, this intra-day reversal suggests the rebound from last week in Hong Kong is over for now,” said Jackson Wong, Tanrich Securities’ vice-president for equity sales.
“The policy risk for China still remains high and it’s unlikely to go away anytime soon. After (the PBOC‘s) change of tone last week, I think there’s some disappointment that they decided not to do anything more today,” Wong added.
China’s benchmark weighted-average seven-day bond repurchase rate slumped 69 basis points to 4.76 percent, its lowest since June 20, after the central bank allowed 36 billion yuan to flow into the banking system through its maturing bills and forward bond repurchase agreements.
Mid-sized Chinese banks weighed on onshore indexes. In Shanghai, China Minsheng Bank and China Merchants Bank each fell more than 2 percent, while Industrial Bank sank 3.2 percent.
Hong Kong shares of Industrial and Commercial Bank of China (ICBC), the country’s largest lender, fell 2.5 percent from a two-week high, while China Construction Bank (CCB) dived 3.5 percent.
The China Daily newspaper reported on Tuesday that the world’s second-largest economy is likely to start a deposit insurance system by the end of this year which will provide a safety net for individual and institutional depositors, citing an official, although coverage limits were not disclosed.
Also weighing on Hong Kong shares were a pair of surveys issued Monday - when the market was shut - showing growth in China’s vast factory sector slowed to multi-month lows in June.
The official PMI slipped to 50.1 in June from May’s 50.8, just a whisker above the 50-point level that indicates growth. The last time the reading fell below 50 was in September. A separate PMI survey, conducted by Markit and sponsored by HSBC, fell to a 9-month low of 48.2 from May’s 49.2.
Other growth-sensitive sectors, particularly the property sector, were also weak on Tuesday. In Hong Kong, China Resources Land tumbled 4.7 percent, while Agile Properties and Hopson Development each suffered losses of nearly 6 percent.
But there were gains for counters expected to benefit from an announcement last Friday that Beijing would raise the price local distributors pay for gas for non-residential use by 15 percent, the first step on a national scale to reduce the loss state-owned gas producers and importers are taking on the fuel.
The move triggered brokerage upgrades for PetroChina , with HSBC raising its rating for its H-share by two notches from underweight to overweight and its target price by more than 14 percent.
PetroChina jumped 5.6 percent in Hong Kong. Datang Power , for which UBS analysts said Beijing’s move is positive for its coal-to-gas projects, surged 10.5 percent.