SHANGHAI China stocks fell on Tuesday morning as Beijing's move to tighten supervision of shadow banking activities and persistent liquidity concerns restrained risk appetite.
Hong Kong stocks also lost ground, as Wall Street strength was eclipsed by weakness in mainland companies listed in Hong Kong.
The blue-chip CSI300 index fell 0.6 percent, to 3,310.63 points at the end of the morning session, while the Shanghai Composite Index fell 0.6 percent, to 3,310.63 points.
The benchmark Hang Seng index dropped 0.3 percent, to 21,768.52 points, after hitting a 4-1/2-month low on Monday.
The Hong Kong China Enterprises Index, which tracks Hong Kong-listed Chinese firms, lost 0.7 percent, to 9,313.70 points, in line with mainland peers.
China's central bank said on late Monday it would tighten supervision of shadow banking businesses by including off-balance sheet wealth management products (WMPs), widely viewed as a source of financial risk, into its risk-assessment framework next year.
The move represents another step by Beijing to rein in speculative credit growth in an effort to prevent asset price bubbles.
Risk appetite was also curbed by persistent weakness in the bond market. The price of China's 10-year treasury futures for March delivery touched a record intraday low on Tuesday.
Nearly all sectors lost ground in China, with property and energy stocks leading the decline, both down more than 1.3 percent.
"The markets were suffering short-term weakness due to supervisors' tightening of the financial system", said Guodu Securities analysts Xiao Shijun.
He said Beijing's signal to keep monetary policy "neutral" next year, top leaders' resolution to curb asset bubbles, and the central bank's move to tighten the grip on shadow banking businesses have all combined to sideline investors.
"Although Beijing has been working on deleveraging over the past year, they have suddenly escalated their efforts recently, putting the market under pressure," he said.
In Hong Kong, sector performance was mixed, with gains in telecommunication stocks cancelled out by losses in financial stocks, even as Wall Street strength overnight offered some support.
(Reporting by Jackie Cai and John Ruwitch)