On Wednesday, analysts said that they expected markets to see more frequent fluctuations within a narrow band. And fluctuate they did on Thursday.

China's A-share market suffered its worst blow since March 4, led by the fall of heavyweight banking shares after new rules issued by the China Banking Regulatory Commission were seen as bearish for the sector.

The Shanghai Composite Index dropped 2.82 percent, or 65 points, while the Shenzhen Component Index shed 2.88 percent.

Hong Kong's Hang Seng Index decreased 0.74 percent to 22,299.63 points, while the Hang Seng China Enterprises Index was down 1.25 percent.

This was a typical scenario where what is deemed beneficial in macroeconomic terms was seen by investors as bad news in the short term.

Media reports on Wednesday that Premier Li Keqiang pledged in a Cabinet meeting to push forward with the liberalization of interest rates were seen as negative for banks.

Analysts said that 2012 will likely be the last year when State-owned banks reap so much profit, especially from their traditional lending businesses. In 2013, banks will have to learn to compete by offering differentiated interest rates, they added.

On Wednesday, in further bearish news, banks were ordered by the CBRC to use no more than 35 percent of the capital raised from wealth management products for investments in informal debt assets.

Also, the banks' investments in such products should represent no more than 4 percent of their total assets, the CBRC said.

Informal debt assets are products such as trust loans, acceptance bills and letters of credit.

"Informal debt assets are broadly known as wealth management products in China," said Xiang Weida, the head of research department at Great Wall Securities Co Ltd.

"Compared with formal debt assets, these financial products typically have high risks and high returns. Most of them are traded outside the exchanges," Xiang said.

Although banking executives said the new requirements will not have a significant impact because banks still depend on their traditional lending businesses for most of their profits, investors saw the new regulation as potentially harmful to the banks' 2013 earnings, Xiang added.

The banking sector slid 4.78 percent on average, with Ping An Bank shares falling 9.6 percent, China Minsheng Bank down 8.6 percent, and Industrial Bank decreasing 9.9 percent.

Industrial and Commercial Bank of China, the world's largest bank by assets, said on Wednesday that its 2012 net profit was 238.7 billion yuan ($38.4 billion), up 14.5 percent year-on-year.

On Thursday, ICBC's shares were down 2.67 percent in Shanghai, after falling 0.24 percent on Wednesday.

"China's banking stocks play an important role in driving the stock market, because they have a huge share of the total market capitalization. Any decrease in the sector will be a disaster for the market," said Yang Delong, chief analyst of the strategy department at China Southern Asset Management.

huangtiantian@chinadaily.com.cn