Chinese shares sagged on Tuesday morning as banking stocks stepped back after Monday’s surge, while the mood was also soured by data showing increased factory sector deflation hurting the pricing power of Chinese firms.

Tighter liquidity also contributed to the market weakness, analysts said, as investors start subscribing to new shares issued by Lens Technology Co Ltd on Tuesday, the first in a series of initial public offerings this week.

China’s key banking sub-index, which jumped nearly 6 per cent on Monday on expectations that lenders would soon be awarded brokerage licences, was down 1 per cent by midday, dragging down main stock indexes.

“Even if banks get brokerage licences, contribution to their profit would be negligible,’’ said Zhang Chen, analyst at Shanghai-based hedge fund manager Hongyi Investment.

“For their rally to be sustainable, you need to see a big reduction in systematic?? risks. But we have not seen clear signs that the economy has bottomed out.’’

In contrast, Shenzhen's ChiNext, which tracks smaller high-growth high-tech tickers, was up nearly 2 per cent, flirting with record highs.

Data released on Tuesday showed that China’s consumer inflation quickened to 1.4 per cent in February, beating market expectations, but factory deflation worsened, underscoring deepening weakness in the economy.

Hu Jiani, analyst at Cinda Securities Co, said the upbeat January data was distorted by consumer behaviour during the Lunar New Year holiday, so investors are taking little solace from the CPI reading.

The CSI300 index fell 0.2 per cent to 3,532.42 points at the end of the morning session, while the Shanghai Composite Index lost 0.1 per cent to 3,298.81 points.

But most stocks in Shenzhen — home to Chinese start-ups and small companies — rose, signalling that money is shifting back into small plays.

The Hang Seng index dropped 0.5 per cent to 24,015.60 points, while the Hong Kong China Enterprises Index lost 0.8 per cent to 11,577.34.

This week, 23 companies will launch IPOs in China, potentially locking 3 trillion yuan of capital from investors subscribing for the new issues, putting downward pressure on stocks.

The biggest fundraising this week would come from Orient Securities Co Ltd, which on Tuesday set its Shanghai IPO price at 10.03 yuan per share, aiming to raise 10 billion yuan. Subscription of its shares will start on Wednesday.

Technology stocks in the mobile device sector were broadly up on Tuesday morning after Apple Inc launched its long-awaited watch.

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