China stocks slump on IPO concern; Hong Kong holds steady

China stocks slumped on Friday morning after the securities regulator said the market has ample liquidity to handle more initial public offerings, with some interpreting it as a signal that IPO activity could be stepped up further.

The market was also spooked by domestic media reports that state-owned Central Huijin Investment Ltd has been slashing holdings in exchange-traded funds tracking main indexes.

The CSI300 index fell 1.5%, to 4,630.94 points at the end of the morning session, on track to close the week up around 1.6%.

The Shanghai Composite Index lost 1.4%, to 4,315.22 points, bringing this week's gain so far to 2.6%.

Xiao Gang, chairman of the China Securities Regulatory Commission (CSRC) told a conference on Friday that the watchdog's recent move to accelerate IPO approvals won't have a big impact on the market, because "there are relatively big inflows of cash" into equities.

His remarks were seen by some as signalling possibly new steps to cool the market.

"I would say two batches of IPOs now already put a lot of liquidity pressure on the market," said Du Changchun, strategist at Northeast Securities Co.

"If the signal is that there's room for more IPOs, it's definitely negative to the market."

Indeed, some also attributed Friday's bearishness to the launch of 20 IPOs next week, which analysts estimate will freeze around 3 trillion yuan ($483.6 billion) in subscription capital.

"Investors seem to be selling some of their holdings to have cash for a new round of IPOs," wrote Gerry Alfonso, director of Shenwan Hongyuan Securities.

Most sectors fell, with telecom and energy stocks among the worst hit as investors took profit after their recent surge.

The only bright spot was the non-ferrous metal sector, with companies including Aluminium Corp and China Minmetals rallying for the second day, after the government said plans to consolidate the rare earth industry have been approved.

Hong Kong stocks were mixed on Friday, with the Hang Seng index adding 0.5%, to 27,419.75 points, and the Hong Kong China Enterprises Index unchanged at 13,779.20.

Hong Kong stocks appear to have lost momentum after April's 13% surge, triggered by expectations of money inflows from the mainland.

"After you have a such a sharp market rally, it's natural for some clients to take profits," said Rakesh Patel, managing director, co-head of equities, Asia-Pacific markets at HSBC.

But "from a valuation perspective, Hong Kong's exposure to China is interestingly valued. Structurally, the market still looks cheap versus the China story, and versus the growth story."