* CSI300 -0.9 pct; SSEC -1.4 pct HSI -0.6 pct
* Investors concerned over possible tightening in margin financing
* Morgan Stanley downgrades China stocks for first time in 7.5 yrs
By Samuel Shen and Kazunori Takada
SHANGHAI, May 7 (Reuters) - China stocks went into the mid-session on Thursday on course for a fall for a third straight day, as fears of fresh moves by regulators to reduce leverage in stock trading dampened risk appetite.
The CSI300 index fell 0.9 percent, to 4,513.67 points at the end of the morning session, while the Shanghai Composite Index lost 1.4 percent, to 4,169.64 points.
Hong Kong stocks followed mainland markets lower, as Morgan Stanley - usually bullish on China - downgraded the MSCI China Index for the first time in 7 1/2 years due to valuation concerns.
Leaks of a set of policy recommendations - including capping the size of margin financing, and limiting the type of stocks investors can buy with borrowed money - started swirling widely on the Internet and in social media late on Wednesday.
China’s securities regulator clarified on Thursday morning that these were merely expert suggestions presented during a seminar, not regulators’ requirements. But the statement was later deleted from the watchdog’s official microblogging account weibo, for unknown reasons.
“There’re signs of a policy shift by regulators. That is worrying,” said Shen Zhengyang, Shanghai-based analyst at Northeast Securities.
He added that China’s liquidity-driven rally is largely fuelled by margin financing, which now accounts for 15-20 percent of daily trading volume, so any tightening would be a big negative.
“Even if we’re still in a bull market, a deep correction could nevertheless be very painful,” he said.
Zhang Yunyi, general manager of Shanghai Hongyi Investment & Management Co Ltd predicted that “de-leverage” fears could knock the main indexes down by 10-20 percent in a correction that could last for over a month.
Hong Kong stocks also fell on Thursday morning.
The Hang Seng index dropped 0.6 percent, to 27,481.28 points, while the Hong Kong China Enterprises Index lost 0.9 percent, to 13,877.99.
Morgan Stanley on Thursday downgraded MSCI China - which captures large and mid cap Chinese companies listed in Hong Kong - to equal-weight, from overweight, the first downgrade of the index since November 2008.
“Dramatic recent outperformance has led to a deterioration in absolute and relative valuations and a technically overbought situation,” Morgan Stanley strategist Jonathan F Garner and his team wrote in a research report.
Editing by Smon Cameron-Moore