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Hong Kong shares finished 0.59 percent lower on Friday owing to concerns over the Chinese economy as well as a liquidity squeeze that has hit the mainland's banks.
The benchmark Hang Seng Index ended down 119.56 points, at 20,263.31 on a turnover of HK$97.17 billion (US$12.53 billion).
While an expected pull-back in the US Federal Reserve's stimulus has hit buying sentiment, a slew of data has set alarm bells ringing over China's economy, while a cash crunch has seen lending between banks almost dry up.
The interbank borrowing rate -- the rate at which banks lend to each other -- has hit record highs in recent weeks, stoking a sell-off in Shanghai and Hong Kong stocks.
The rate sharply dropped on Friday, however, providing some respite, although traders remain cagey about the state of the economy.
The seven-day repurchase rate -- a benchmark for interbank borrowing costs -- fell to 8.33 percent from Thursday's close of 11.62 percent, amid rumours the central bank had pressured lenders to release funds
Some traders said the People's Bank of China may have asked major state lenders to refrain from hoarding cash and release more funds to ease the liquidity squeeze.
"I think in the short term the market overreacted yesterday," William Lo, a portfolio manager at Ample Capital, told the Dow Jones Newswires. He remains cautious about the sector in the long term, however, noting a lack of transparency makes it hard to determine lenders' true funding needs.
China Construction closed up 0.8 percent after plunging 5.2 percent on Thursday, ICBC shook off a 3.8 percent drop to close 1.1 percent higher.
China Mobile closed 2.7 percent higher at HK$71.10 after it reported a nearly 8 percent jump in the number of customers using higher-margin 3G services last month.
Chinese stocks closed down 0.52 percent. The benchmark Shanghai Composite Index fell 10.93 points to 2,073.09 on turnover of 67.4 billion yuan ($11.0 billion). The index lost 4.11 percent for the week.
"The volatility in borrowing costs in the interbank market was the major reason for losses in the (domestic) share market," Sinolink Securities analyst Tao Jinggang told AFP.
"As the borrowing rates trended lower, investors' panic sentiment was relieved for the time being and the index recovered a bit," he said.
Financial stocks were mixed, with some rising on reports that Central Huijin, the investment arm of China's sovereign wealth fund, had raised its stakes in selected banks and insurers.
New China Life Insurance surged 8.77 percent to 24.81 yuan and China Merchants Bank rose 2.09 percent to 11.71 yuan. But Pudong Development Bank shed 1.66 percent to 8.28 yuan.
With bullion prices falling Zijin Mining dropped 1.83 percent to 2.68 yuan and Henan Yuguang Gold & Lead lost 0.64 percent to 10.88 yuan.