INTERVIEW-Banks could be obliged to set Libor rates
* Alternatives to Libor to be found for some contracts
* HSI -1.1 pct, H-shares -2 pct, CSI300 -3.1 pct
* China banks slump after regulator orders more checks on WMPs
* State Council pledges to further liberalise interest rates
* Chalco dives after 2012 earnings underwhelm
By Clement Tan
HONG KONG, March 28 China shares were headed for their worst loss in nearly a month on Thursday, hurting Hong Kong markets, with banks taking a hit after they were ordered to tighten control over wealth management products (WMP) and improve transparency.
The move is China's latest in warding off potential risks to the financial system and comes after an instrument sold through Hua Xia Bank failed to pay its annualised return while China's CITIC Trust announced payment delay on its product late last year.
Banks were also under pressure after China's cabinet said it will unveil new measures to further liberalise interest rate and exchange rate markets later this year, stoking worries of an erosion in banks' net interest margins.
At midday, the CSI300 of the leading Shanghai and Shenzhen A-share listings was down 3.1 percent at 2,504.3, with chart resistance next seen at the March 19 low at around 2,492. The Shanghai Composite Index shed 2.6 percent.
The Hang Seng Index slid 1.1 percent to 22,214.6, coming off its highest close since March 18 it set on Wednesday. The China Enterprises Index of the top Chinese listings in Hong Kong was down 2 percent.
Hong Kong markets are shut for a four-day Easter weekend from Friday and will reopen on Tuesday. The territory's two benchmarks are now up 0.4 and down 0.8 percent on the week, respectively.
"The timing of the announcement caught the market by surprise, although people were already expecting the regulators to act," said Hong Hao, chief strategist at Bank of Communication International Securities.
"This is definitely not the lowest point of the market, I won't be trading at all if I don't have to. It's not even worth trying to catch a market rebound in the near term," Hong added.
Mid-sized Chinese banks were among the top drags on onshore Chinese indexes. China Minsheng Bank dived 8.6 percent in Shanghai, cutting its 2013 gains to 22.6 percent. Industrial Bank slumped 9.9 percent, while Hua Xia Bank slid 6.9 percent.
In Hong Kong, Minsheng Bank tumbled 6.7 percent, plumbing its lowest intra-day levels since mid-January.
The China Banking Regulatory Commission singled out risks of investment in "informal debt assets", such as trust loans, letters of credit, accounts receivable and bank acceptance bills, among others, in a clutch of instruments that are broadly categorised in China as "wealth management" products.
Banks are now required to keep investments in such assets at no higher than 35 percent of total outstanding wealth management products, or no more than 4 percent of their total assets - whichever is the lower amount.
The aim is to bring these products back onto the balance sheet of banks, making it easier to track and monitor risks.
"We expect large banks to have lower WMP/asset ratio as well as less percentage of WMPs invested into non-standard credit assets than mid-size joint-stock banks," said May Yan, Barclays' top-rated China banking analyst, in a note on Friday.
More Chinese policy cues, but from the property sector, could weigh on markets towards the end of the month as local governments release details of property sector curbs that Beijing first provided guidelines for at the start of March.
China Vanke shed 2.6 percent in Shenzhen, while Poly Real Estate slid 2.5 percent in Shanghai and China Overseas Land lost 2.1 percent.
The 21st Century Business Herald newspaper reported that Shenzhen, a city in the southern Guangdong province, is likely to raise minimum down payment for second homes from 60 to 70 percent from April with the minimum mortgage rates kept unchanged.
These latest government moves come after China's "Big Four" banks reported benign bad-loan ratios as brisk lending in fast-growing regions countered souring loans to overheated sectors on the country's east coast.
Shares of Industrial and Commercial Bank of China (ICBC) , which was the last among the "Big Four" to report their 2012 results on Wednesday, was down 2.4 percent in Shanghai and 2.2 percent in Hong Kong.
According to Thomson Reuters StarMine, of the 76 percent of Hong Kong-listed companies that have reported 2012 results, more than half have missed expectations, with the energy and material sectors accounting for the bulk of disappointments.
Sixty-seven percent of China-listed companies have reported, with 72 percent missing expectations, with percentage disappointments in the industrials, materials, information technology and consumer staple sectors hovering around 80 percent.
Aluminum Corporation of China (Chalco) dived 4.5 percent in Hong Kong and 4.1 percent in Shanghai after its 2012 net profit still came in worse than expected despite having earlier warned of a full-year loss in January.
China's industrial firms made total profits of 709.2 billion yuan ($114.13 billion) in the first two months of 2013, up 17.2 percent from the same period of a year ago, the National Bureau of Statistics said on Thursday.
* Alternatives to Libor to be found for some contracts
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* Investors fear record fines, risk of countersuing regulator