The dollar rose to a 4-1/2 month high against a basket of currencies. The greenback also jumped against the Hong Kong dollar as funds pulled out. "With the US dollar rebound, that will lead to a deeper correction with the carry trade activity," said Steven Lam, vice-president at Karl-Thomson Securities. The benchmark Hang Seng Index fell sharply in afternoon trade, ending down 423.50 points at 20,862.67, its lowest close since October 6. The China Enterprises Index of top locally listed mainland Chinese stocks was down 2.64 percent at 11,957.83.
Market turnover rose to HK$83.13 billion ($10.70 billion) from Wednesday's HK$74.62 billion. Peter Lai, a director at DBS Vickers, said some local media had reported in the late afternoon that an interest rate rise in China could occur earlier than expected, prompting investors to sell stocks.
"Some funds are leaving," Lai said. "It really depends on the US dollar. With this kind of rumour (on the possible rate rise), carry trade unwinding would be faster." China easily beat its 2009 growth target after a blistering fourth quarter performance that set the stage for further monetary tightening and put it on course to overtake Japan to become the world's second-largest economy.
Chinese banks, which slid on Wednesday on news that the Chinese banking authorities had instructed some major banks to restrict lending for the rest of January after a burst of credit in the first couple of weeks, extended their declines in Hong Kong in active trade on fears of tighter monetary policy.
China Construction Bank (CCB) was down 1.61 percent at HK$6.12. Bank of China was down 2.03 percent at HK$3.87. Industrial and Commercial Bank of China had fallen 2.89 percent to HK$5.72. China's key stock index staged a mild 0.22 percent rebound on Thursday, led by banks, as fears over official liquidity tightening eased while fresh data depicted an economy on track for a full recovery. The Shanghai Composite Index also appeared to find support when it approached the closely watched 125-day moving average at 3,120 points during intraday trading.
The index finished at 3,158.863 points, after a nearly 3 percent fall on Wednesday sparked by news that the Chinese authorities had instructed some banks to restrict lending for the rest of January. Gaining stocks outnumbered losers by 571 to 321 but turnover tumbled to a sluggish 142 billion yuan ($21 billion) from Wednesday's 192 billion yuan, a clear indication that cautious market sentiment capped buying interest.
Banks rebounded on Thursday from heavy losses a day earlier, which were sparked by worries over the credit clampdown. Top lender Industrial and Commercial Bank of China closed up 1.83 percent at 5.02 yuan and was one of the most actively traded stocks.
China said on Thursday its annual GDP growth accelerated in the fourth quarter of last year to 10.7 percent from 8.9 percent in the third quarter. The consumer price index rose 1.9 percent in December. China's steelmakers, which rely heavily on bank loans for expansion and will be among the industries hit hardest by a credit tightening, bucked the market's uptrend on Thursday. Top steel mill Baoshan Iron and Steel Co closed down 2.40 percent at 8.14 yuan, while smaller rival Wuhan Iron and Steel fell 1.88 percent to 7.32 yuan.