* Hang Seng Index, Shanghai Composite down 1.3 percent
* Strong Q4 GDP growth in China points to further tightening
* Overbought large caps HSBC, Tencent, Cosco Pacific slide
* Materials sector sees profit-taking as commodities weaken (Updates to midday)
By Vikram S.Subhedar and Lu Jianxin
HONG KONG/SHANGHAI, Jan 20 (Reuters) - China and Hong Kong shares were lower by midday Thursday after stronger-than-expected fourth-quarter Chinese GDP data pointed to further policy tightening, while weaker commodities prices hit the overbought materials sector.
China's key Shanghai Composite Index was down 1.3 percent at midday, with banking and commodities stocks weighing as the latest economic data pointed to a need for further monetary tightening.
Hong Kong's Hang Seng Index also fell 1.3 percent, with Chinese banks and some recent big gainers slipping amid a broad selloff across Asia.
Disappointing earnings from Goldman Sachs group Inc and weak U.S. housing data hit appetites for riskier assets, knocking 1 percent off the S&P 500 index.
Heavyweight HSBC Holdings Plc fell 1.5 percent, the biggest drag on the benchmark, as retail investors who had piled into the stock took profit after recent gains took their relative strength index above 70, indicating overbought conditions.
In Shanghai, a money market liquidity crunch capped trading flows, with market players expecting further rises in bank reserve ratios as China's central bank tries stem money supply growth.
The government posted the final set of 2010 economic data on Thursday, with the latest figures showing growth soaring past expectations while inflation slowed by a touch.
The People's Bank of China has already taken a slew of steps since October to restrain inflation, including raising official interest rates twice and bank reserve requirement ratios four times, severely diminishing money market liquidity supply.
"In fact, overheating signs have already emerged in the Chinese economy," said He Yifeng, an analyst with Hongybuan Securities in Beijing. "The central bank will continue to raise bank deposit reserve requirements in coming weeks, and the next interest rate rise will take place in March or April."
Inflation eased in December although the market impact was limited after the numbers had already leaked out into the market on Wednesday.
"All is bad news," said a trader at a major Chinese brokerage in Shanghai. "The market may fall further to bridge October's technical gap. The support at 2,700 points appears shaky."
The materials sector was weaker across the board after commodity prices fell despite a weaker U.S. dollar.
Top coal producer China Shenhua Energy Co Ltd was the biggest mover on the Shanghai index in the morning session, falling 2 percent.
Shippers and port operators slid. Cosco Pacific Ltd, up 12.2 percent this year, fell 3.1 percent in Hong Kong.
Gold producer Zijin Mining Group Co Ltd dropped 2.7 percent in Hong Kong.
In Shanghai, Industrial and Commercial Bank of China Ltd, the world's largest lender by market capitalisation, was the second-biggest mover with a loss of 0.7 percent, followed by China Petroleum and Chemical Corp (Sinopec), which dropped 1.0 percent.
Turnover of Shanghai A shares remained low at 46 billion yuan ($7 billion) from Wednesday morning's 44 billion yuan. ($1=6.6 Yuan) (Editing by Chris Lewis)