* CSI300 index loses 1.3 percent as blue-chips weigh
* Shanghai Composite Index closes down 0.9 percent
* Reports of new rules on asset-backed securities underscore regulatory concerns
* Bond market 'relatively stable' but mood remains fragile
By Andrew Galbraith
SHANGHAI, Nov 27 (Reuters) - Heavy selling of blue-chip shares dragged China's stock markets sharply lower Monday, as the spectre of rising borrowing costs hitting company profits haunts investors amid an increasing regulatory crackdown on risky financing.
Selling in China's stock markets last week had been prompted by a rout in the bond market that pushed yields on government treasury bonds to three-year highs, and by fresh moves to reduce risks in the asset management industry that may bring a sea change for banks and millions of small investors.
But while bond market jitters appeared to ease on Monday, stock market investors continued to unload shares in major firms that have enjoyed strong gains in recent weeks.
The blue-chip CSI300 index ended 1.3 percent lower at 4,050.67 points. The Shanghai Composite index was 0.9 percent lower at 3,322.23, while Hong Kong's Hang Seng index was 0.6 percent lower at 29,692.58 by 0725 GMT.
Major internet-of-things supplier BOE Technology , seen as a blue-chip bellwether, tumbled 9.7 percent on news that major shareholders planned to cut their stakes in the company.
Shares in the company had surged 51.6 percent from the beginning of October to their highest closing price in nine years on Nov. 21, but have since plunged nearly 22 percent. "Blue chips have been rising too fast ... and soaring prices of stocks such as Moutai have apparently raised regulatory eyebrows," said Chen Xiaopeng, strategist at Sealand Securities Co, referring to liquor maker Kweichow Moutai.
"In addition, the new guidelines on asset management business have triggered expectations of tighter liquidity."
More regulatory measures may be on the way. Economic Information Daily reported on Monday that regulators are expected to tighten controls on consumer loan asset-backed securities ABS), in the latest move to increase oversight of financial products.
Some analysts said they saw a silver lining in the increased oversight.
"The recent correction in those blue chips stocks due to warnings from government as well as spill over effects from the bond rout may be good to prevent overheating in stock market," OCBC analysts wrote in a note Monday, pointing to the divergent performance of blue-chip stocks and smaller stocks, many of which are in the red this year.
Despite persistently high yields, traders said the bond market was subdued on Monday, though sentiment remained fragile as regulatory tightening keeps borrowing costs elevated and companies start to hoard cash heading into the year-end, when liquidity typically tightens.
The yield on Chinese 10-year treasury bonds stood at 3.979 percent on Monday, while five-year AAA-rated corporate bonds issued by Jiangsu Communications Holding were quoted at 5.201 percent, up 38.5 basis points since the end of October.
Yields on shorter-term instruments also remain high. AAA-rated three-month commercial paper yielded 5 percent, reflecting a rise of 57 basis points in November.
"Traders are hesitating, with no clear view on the direction," said a fixed-income manager in Shanghai.
"It's near the year-end, everyone is calculating bonuses so nobody wants to take more risk. Traders may just hope there will be no further drops in the market before the end of the year."
Markets largely shrugged off data showing profits at China's industrial firms continued to grow at a robust pace last month despite a slight cooling from a sizzling September.
Profits earned by China's industrial companies in October rose 25.1 percent from a year earlier, slowing from a 27.7 percent gain in September.
While robust earnings should give China Inc more room to reduce its massive debt - a key government priority - a Reuters analysis shows the debt pile at listed Chinese firms is still climbing, with levels at the end of September growing at the fastest pace in four years.
Highlighting the size of the problem and the potential drag on future economic growth, debt servicing costs have gobbled up about a fourth of state-owned firms' revenues in the last few quarters, and higher interest rates could see that burden grow.
China's yuan inched up against the dollar on Monday, but gains were capped as companies increased their purchases of the U.S. currency, traders said.
The onshore spot yuan opened at 6.5970 per dollar and was trading at 6.6060 at 0725 GMT.
Writing by Andrew Galbraith; Additional reporting by Samuel Shen, Luoyan Liu and Winni Zhou; Editing by Kim Coghill