WPL Woodside Petroleum Limited

By Chao Deng 

China's main stock benchmark entered a bear-market Friday, following a deep afternoon selloff that dragged markets in the rest of the region lower.

The Shanghai Composite Index fell 3.6% to 2900.97. The index has fallen 20% from its recent high, the definition of a bear market, reached on Dec. 22.

Elsewhere, Hong Kong's Hang Seng Index was down 1.4%, Australia's S&P/ASX 200 fell 0.3% and South Korea's Kospi slipped 1.1%.

Traders and analysts attributed the sharp selloff to a Chinese state-run media outlet's report that some Chinese banks were no longer accepting stocks as collateral for loans. The Chinese bank regulator didn't immediately return a call for comment.

The prospect that liquidity could be drying up raised concerns among already-nervous investors about the outlook for the market, despite a rebound the previous day.

If banks have stopped accepting loans as collateral "it will further tighten liquidity in the market and create panic selling," said Steven Leung, director at UOB Kay Hian in Hong Kong. "The news is very confusing."

Meanwhile, the Hong Kong dollar, which is pegged to the U.S. dollar, fell to as weak as 7.7987 to one U.S. dollar. It has fallen 0.5% in two days, its biggest two-day fall since 1986.

The afternoon selloff in China's main stock exchange followed Beijing published data that showed demand for bank loans in the world's second-largest economy remains weak. Meanwhile, Chinese banks remain wary of boosting lending to businesses.

Data from the nation's central bank showed earlier Friday that Chinese banks issued 597.8 billion yuan ($90.7 billion) of new yuan loans in December, down from 708.9 billion yuan in November and below the 700 billion yuan forecast made by economists polled by The Wall Street Journal.

After two weeks of selling that drove the Shanghai index down 18%, investors said they would look for answers at a routine weekly briefing by China's stock regulator to be held later Friday.

The renewed bout of volatility in China added to investors' concerns about slowing growth in the rest of the region during the Asia day. Oil prices, which rose overnight, turned lower. Brent crude oil last down 1.5% at $30.43 a barrel.

The move cut into energy gains earlier in the region: In Hong Kong, energy stocks fell 3.3%. The sector was up just 0.4% in Australia.

"There's nothing really out there giving people encouragement," said Andrew Sullivan, managing director at Haitong International in Hong Kong.

Early Friday, China's central bank set the yuan at 6.5637 to one U.S. dollar, marking the sixth-straight session it has guided the currency roughly steady.

In the freely traded offshore market, the yuan traded at 6.6162 to one U.S. dollar, up 0.3% from the previous day. Onshore, where the yuan can trade up or down 2% from the central bank's daily fix, the currency traded at 6.5866, roughly unchanged from the previous day.

The Japanese yen was up 0.2% at Yen117.85 to one U.S. dollar. The local currency has gained 2% year-to-date, as turmoil in Chinese and global markets have sent investors to rush for safety.

The Indonesian rupiah strengthened 0.1% to 13,895 to one U.S. dollar. The currency had fallen as much as 1% on Thursday after news of explosions in the Southeast Asian country's capital city of Jakarta, although it recovered slightly after suspected government intervention following a rate cut by the central bank.

Gold prices were up 0.4% to $1,078 a troy ounce.

Shen Hong contributed to this article.

Write to Chao Deng at Chao.Deng@wsj.com

(END) Dow Jones Newswires

January 15, 2016 02:52 ET (07:52 GMT)

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