The benchmark Hang Seng Index closed 0.97% or 159.37 points lower at 23,527.26. The China Enterprises Index of top locally listed China stocks fell 0.92% to 12,806.59.
Shanghai's benchmark Composite Index eased to 2,791.81 points, falling past the 2,800-point psychological level and the 250-day moving average, now at 2,836 points.
"The fundamentals of these stocks haven't changed," said Ben Kwong, chief operating officer at KGI Asia in Hong Kong. "The government is trying to keep inflation in check, and this will mean that the major banks and property developers will have to step in line."
The China Securities Journal reported that the southwestern Chinese city of Chongqing was set to become the country's first to introduce a long-debated property tax as part of efforts to fight sky-high house prices.
Among China-focused real estate developers in Hong Kong, China Resources Land Ltd dropped 3% and Hang Lung Properties Ltd fell 2.3% on concern that the new tax could hit buyers looking at second or third properties.
Hong Kong developers Sino Land Co Ltd and Henderson Land Development Co Ltd were also dragged down, falling 0.88% and 0.62%, respectively.
The Hang Seng Index's slow stochastic, an indicator of short-term trends, is now being pulling back from oversold territory for the first time this year, suggesting that buying could soon resume.
Further falls on the Shanghai bourse could also be limited as it remained abundant with liquidity, said Haitong Securities analyst Zhang Qi.
"Don't be too negative now," said Zhang. "It may be a correction. An abundance of funds and optimistic company earnings may support the market."
Property counters in Shanghai initially showed a limited reaction to reports on property taxes but came under selling pressure in afternoon trading as investors digested the news. A sub-index of property companies fell 2%.
China Vanke Co Ltd, the most active stock in the Shenzhen market, fell 1.7%, while Gemdale Corp, the third most active stock in the Shanghai market, was down 2%.
The index of small-cap companies fell 2.9%, underperforming the broader market's decline, after the head of China Securities Regulatory Commission said China might get rid of poor-performing second board stocks. The small and second board indexes fell.
Medical appliance maker Wuhan Humanwell Hi-tech Industry Co Ltd was among the biggest losers in the Shanghai market, falling 9.2%, while Nantong Jinghua Pharmaceutical Co Ltd fell 6.3%.
Among gainers, China Hainan Rubber Industry Group Co Ltd, the most actively trade share in the Shanghai market, jumped by its 10% daily limit after a strong debut on Friday.
About 2,000 listed companies in China are set to report their 2010 annual results from now until the end of April. Overall corporate earnings are believed better than previously expected, possibly rising as much as 40% in 2010 from 2009.
But most companies typically report their profits starting in March so the initial impact of stronger-than-expected earnings would be measured, traders said. — Reuters
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