August 3, 2017 / 5:07 AM / a year ago

China stocks sag after soft service sector report; Hong Kong slips

* SSEC -0.2 pct, CSI300 -0.5 pct, HSI -0.2 pct

* Growth in China’s services sector slows in July-Caixin PMI

* Net drain by central bank for the first time since mid-July

SHANGHAI, August 3 (Reuters) - China stocks fell on Thursday after a private survey showed the country’s services sector cooled in July and as a net drain of funds by the central bank renewed concerns about liquidity conditions.

The CSI300 index fell 0.5 percent to 3,741.35 points by the end of the morning session, while the Shanghai Composite Index lost 0.2 percent to 3,277.19, slipping from Wednesday’s eight-month intraday high.

China’s services sector expanded at a slightly slower pace in July as new business growth eased, a private business survey showed on Thursday.

The findings were in line with an official gauge of the non-manufacturing sector published on Monday which also showed growth in services cooled, adding to views that China’s economy could slow slightly in coming months after a strong start to the year.

The survey undermined market sentiment as the Shanghai Composite was approaching a key technical level, market participants said.

“The SSEC is now trading near the 3,300-level, which is a key mark and could take much time to break through,” said Zhang Gang, analyst with China Central Securities.

The SSEC last flirted with that level in December 2016 and April 2017, but failed to breach it and advance further.

Financial shares could take a breather, Zhang added, as solid first-half profit growth for those firms is being priced in.

Concerns about tighter liquidity also dampened activity.

China’s central bank on Thursday drained a net 20 billion yuan via its open market operations, its first net drain since July 13..

Liquidity had also been squeezed in June and July, pushing money market rates higher and prompting the central bank to inject funds into the system. But tightness early in a month is rare.

“The net drain today does not signal a change in monetary policy, and the central bank will maintain frequent communication with the market to maintain steady expectations,” Industrial Securities noted in a report.

Most sectors lost ground in the morning, led by banking and consumers stocks.

Materials firms continued to outperform, with a 0.8 percent gain.

Aluminum Corp Of China, China’s largest aluminium maker, leapt 7.3 percent to a near two-year high. The stock has gained more than 60 percent this year.

Material companies, in particular large state-owned firms, have been among this year’s best performers as they are expected to benefit most from Beijing’s continued supply-side reforms. Resources prices have risen as China works to shut older, inefficient plants in sectors with huge overcapacity.

Shares in listed units of Anbang, including developer Financial Street, edged lower, after the nation’s insurance regulator said it has no plans to ask the financial conglomerate to sell overseas assets.

Hong Kong stocks followed other Asian markets lower, as investors locked in recent gains.

The Hang Seng index dropped 0.2 percent to 27,566.80, easing from Wednesday’s 26-month high.

The Hong Kong China Enterprises Index lost 0.3 percent, to 11,019.60.

Sector performance was mixed.

Material and telecommunications sectors led the gains, while financial and information technology lagged.

China Unicom Hong Kong gained 4.4 percent as Beijing seeks to revitalize state-owned firms through changes to their management structure.

China Shenhua, China’s largest coal producer, slipped 0.5 percent by midday, and was the biggest drag on the energy sector. ($1 = 6.7273 Chinese yuan renminbi)

Reporting by Luoyan Liu and John Ruwitch; Editing by Lisa Twaronite

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