Hong Kong shares ended down 0.54 per cent on Monday, in line with a regional sell-off as traders await a policy meeting of the US Federal Reserve later in the week.
The benchmark Hang Seng Index slipped 118.80 points to 21,850.15 on turnover of HK$42.17 billion (US$5.44 billion).
Investors were also spooked by news at the weekend that China’s national auditor will carry out an audit of all government debt.
The move raised concerns in the market that government spending on capital projects could be cut back after driving the economy for years, hitting companies that rely on such spending.
Eyes are on the United States, however, with dealers hoping the Fed will provide new clues about the future of its massive stimulus programme.
Mainland financial shares showed some of the sharpest drops following news of the Chinese debt audit.
ICBC shares fell 1 per cent to HK$5.06 and Bank of Communications shed 1.8 per cent to HK$5.04.
Edward Fung, investment advisory head at Kim Eng Investors, told Dow Jones Newswires that investors wanted to stick to the sidelines “rather than put their money in an uncertain market”.
He added: “Getting towards the 22,000 level seems like a bit of a hurdle.”
Stocks in solar energy companies bucked the day’s downturn, buoyed by news over the weekend that Chinese officials had struck a deal with the European Union to end their protracted trade dispute.
The agreement allows Chinese manufacturers to avoid a tax hike if they agree to sell panels above the minimum price.
GCL-Poly shares gained 1.5 per cent to HK$1.99 while Solargiga Energy rose 2.5 per cent to HK$0.41.
In Shanghai investors also sold off Chinese stocks with shares ending down 1.72 per cent.
The benchmark Shanghai Composite Index dropped 34.54 points to 1,976.31 on turnover of 65.87 billion yuan (HK$82.68 billion).
“The news (of the audit of local governments) adds downward pressure to the already bearish market. Trading shrinks and capital is being withdrawn from the market as investor confidence is waning,” Haitong Securities analyst Zhang Qi said.
Cement shares led the losers. Anhui Chaodong Cement fell 7.13 per cent to 9.38 yuan and Anhui Conch Cement shed 6.32 per cent to 14.09 yuan.
Shipbuilder Jiangnan Heavy Industry slumped 9.71 percent to 9.02 yuan and Guangzhou Shipyard International lost 4.29 percent to 8.93 yuan.
But solar panel manufacturers bucked the trend. Jiangsu Sunshine gained 2.63 per cent to 2.34 yuan and Sanan Optoelectronics was up 2.32 per cent at 20.77 yuan.